Chapter 9: Savings, Interest Rates, and the Market for Loanable Funds

Vocabulary flashcards covering key terms and concepts from Chapter 9: Savings, Interest Rates, and the Market for Loanable Funds.

Loanable funds market

A market where savers supply funds for loans to borrowers; banks act as the bridge, and the price is the interest rate.

Savers

Households or foreign entities that save funds through deposits, bonds, and stocks.

Borrowers (demanders of funds)

Firms and governments that borrow funds to invest and produce output.

Banks as the bridge

Financial intermediaries that connect savers and borrowers, earning profits from the interest rate spread.

Interest rate

The price of loanable funds; the return to savers and the cost to borrowers.

Real interest rate

Inflation-adjusted rate; the true purchasing power return on saving or the real cost of borrowing.

Nominal interest rate

The stated rate without adjusting for inflation; roughly equal to real rate plus inflation.

Inflation

The rate at which the general price level rises; explains why nominal rates exceed real rates.

Supply of loanable funds

Total funds that savers are willing to lend at various interest rates.

Demand for loanable funds

Total funds that borrowers are willing to borrow at various interest rates.

Shift in the loanable funds supply

A movement of the entire supply curve to the left or right caused by changes in income/wealth, time preferences, or consumption smoothing.

Shift in the loanable funds demand

A movement of the entire demand curve to the left or right due to changes in investment opportunities or expected returns.

Income and wealth (as a supply factor)

Higher income or wealth increases saving incentives, shifting the supply of loanable funds to the right.

Time preferences

Preference for receiving goods sooner rather than later; higher time preference reduces saving, lower time preference increases saving.

Consumption smoothing

The tendency to spread consumption evenly over a lifetime, achieved through borrowing in youth, saving in middle years, and dissaving in retirement.

Life-cycle savings

Saving pattern across the life cycle: borrow in youth, save in prime years, dissaving in retirement.

Borrowing and dissaving

Borrowing when young and spending down savings in old age as part of the life cycle.

Midlife population effect

More people in midlife raise aggregate savings, shifting the supply of loanable funds to the right.

GDP influence of the loanable funds market

A well-functioning loanable funds market supports investment, which helps raise GDP.

Nominal vs. real rate relationship

Nominal rate = real rate + inflation; real rate = nominal rate − inflation.