4.7 | Loanable Funds Market

What is the y-axis on a loanable funds market? What is it abbreviated as?

Real interest rate, r

What is the x-axis on a loanable funds market? What is it abbreviated as?

quantity of loanable funds, Q

What are the determinants of loanable funds demand? Basically, what would shift the demand curve?

Changes in the expected rate of return on investment

Businesses demand (more/less) loanable funds when they expect to earn more on the investments they’re purchasing with those loans.

more

What are the determinants of loanable funds supply? Basically, what would shift the supply curve?

Changes in disposable income (consumer savings), changes in foreign investment

When foreign investors move their financial capital into a country, they (increase/decrease) the supply of loanable funds available.

increase

Interest rates are high. This causes an (increase/decrease) in the quantity of new investment (gross investment), which (increases/decreases) capital formation and (slows/hastens) economic growth.

decrease, decrease, slows

If there is a decrease in the supply of loanable funds, interest rates (rise/fall) and economic growth will (decrease/increase).

rise, decrease

If there is an increase in the supply of loanable funds, interest rates (rise/fall) and economic growth will (decrease/increase).

fall, increase

Crowding out is the idea that…

expansionary fiscal policy will reduce private investment and decrease long-run economic growth

Expansionary fiscal policy (increases/decreases) the deficit. As a result, the government will borrow (more/less) and (increase/decrease) its debt.

increases, more, increase

When governments borrow more, interest rates in the loanable funds market (increase/decrease), causing private investment to be ______.

increase, crowded out

Contractionary fiscal policy (increases/decreases) the deficit. As a result, the government will borrow (more/less) and (increase/decrease) its debt.

decreases, less, decreases

When governments borrow less, interest rates in the loanable funds market (increase/decrease), causing the _______ to increase.

decrease, quantity of investment