Looks like no one added any tags here yet for you.
what does savings equal in the entire economy, an open economy, and a closed economy?
I = savings (economy as a whole)
I = savings = national savings (closed economy, public sector)
I = savings = national savings + capital inflow (open economy, foreign sector)
savers want to ____ money
lend
firms with IS projects want to ____ money
borrow
loanable funds market
a hypothetical market that brings together those who want to lend money and those who want to borrow money
IR is denoted by “r,” is the return a lender receves for allowing borrowers the use of $1 for 1 yr.
IR is the real interest rate
why do loan contracts specify a nominal IR instead of a real IR?
can’t be sure what future IR will be (reason why vertical axis of LF graph is nominal IR)
why is the demand curve for loanable funds downward sloping?
rate of return on a project
rate of return
the profit earned on a project expressed as a percentage of its cost
((revenue - cost)/cost)*100
t or f: businesses will only want a loan when ROR is greater than or equal to the IR
t
shifters of the demand curve for loanable funds
changes in perceived business opportunities
a. optimism → R shift
changes in the government’s borrowing
a. more deficit → more borrowing → R shift (lower IS)
investment tax credit
an amount that firms are allowed by law to deduct from their taxes based on their IS (incentivizes investment)
can increase ROR for a R shift
crowding out
occurs when a govt. deficit drives up the IR and leads to less IS
shifters of the supply curve for loanable funds
changes in private saving behavior
a. less saving → L shift
changes in capital inflows
a. more inflows → R shift
most important factor affecting IR over time
changing expectations about future inflation
real IR
nominal IR - inflation rate
represents the cost of borrowing + payoff to lending
fisher effect
an increase in expected inflation drives up the nominal IR by the same # of percentage points, leaving the expected real IR unchanged
IMPORTANT INFO
eq. IR in loanable funds market = eq. IR in the money market
in SR, MM leads, LF IR will follow
in LR, LF leads, MM IR will follow
t or f: changes in the money supply affect the IR in the long run
f: they do not affect the IR, only the supply and demand for loanable funds do
the eq. IR in the LR is the rate that matches the supply of LF w/ the demand of LF when RGDP = potential output
why is the supply curve for the loanable funds market upward sloping?
as IR increases, people will want to save more money. they put more money into banks, and banks will have more to loan out in excess reserves, increasing the supply of loanable funds.
calculate private savings
GDP - taxes - consumption
calculate public savings
tax revenue - government spending
calculate national savings
private savings + public savings
equal to investment spending
calculate investment spending
GDP - C - G - NE
or equal to national savings
calculate total savings
national savings - capital inflow