econ chapter 9

What is the loanable funds market?

The market where savers supply funds for loans to borrowers.

Who are typically the savers in the loanable funds market?

Households and foreign entities.

What is the chain of borrowing?

Saving -> borrowing -> investment -> output.

What do firms need to do to fund capital and other investment purchases?

Borrow money, as most businesses cannot rely solely on cash.

What are interest rates in the context of loanable funds?

The price of loanable funds, quoted as a percentage of the original loan amount.

How is the interest rate determined?

By market supply and demand.

From a saver's perspective, what is the reward for saving?

Interest earned on the saved funds.

When should a firm consider borrowing funds?

If the expected return on investment is greater than the interest rate on the loan.

What does the Fisher equation describe?

The relationship between real interest rates, nominal interest rates, and inflation.

What is 'real interest rate'?

The interest rate corrected for inflation.

What is 'nominal interest rate'?

The interest rate before inflation.

What influences the supply of loanable funds?

Changes in income and wealth, time preferences, and consumption smoothing.

What is the effect of an increase in income or wealth on savings?

It generally produces an increase in savings.

What happens when capital is more productive?

The demand for loanable funds will increase.

What are 'animal spirits' according to John Maynard Keynes?

The measures of what firms expect for future economic activity, driving investment decisions.

What do governments typically borrow for?

To finance their debt when tax revenue isn’t sufficient.

What causes a shift in the demand for loanable funds?

Changes in productivity, investors' confidence, and government borrowing.

What does consumption smoothing refer to?

The practice of borrowing and saving to maintain consistent consumption throughout one’s lifetime.