The Market for Loanable Funds

Flashcards covering key vocabulary and concepts related to the supply and demand model and its application to the market for loanable funds.

Supply and Demand Model for Loanable Funds

A model used to understand how the financial system coordinates saving and investment activities, and how government policies and other factors affect savings, investments, and interest rates.

Interest Rate

The single interest rate in the market, representing both the return to savings and the cost of borrowing.

Suppliers of Loanable Funds

Private households and the public sector who provide funds to the economy with extra income.

Demanders of Loanable Funds

Firms and households that borrow funds to invest in the economy, such as for new equipment, factories or housing.

Equilibrium Interest Rate

The rental price of money, which adjusts to equate the supply and demand for loanable funds.

Saving Incentives

Government tax incentives that increase the supply of loanable funds, leading to lower interest rates and increased quantity of loanable funds.

Investment Incentives

Government policies, such as investment tax credits, that increase the demand for loanable funds, resulting in higher interest rates and increased quantity of loanable funds.

Government Budget Deficit

When the government runs a budget deficit, national savings and the supply of loanable funds decrease, leading to higher interest rates and reduced investment.

Crowding Out Effect

The phenomenon where government borrowing to finance its deficit reduces the funds available for private investment.

Debt to GDP Ratio

A ratio that indicates the government's indebtedness relative to its ability to raise tax revenue.

Function of Financial Markets

Financial markets help allocate the economy's limited resources to their most efficient uses and enable savers to convert current income into future purchasing power.