Loanable Funds Market and Macroeconomic Identity

Flashcards covering basic macroeconomic identities, the loanable funds market, the natural law argument against usury, and the impact of economic policies on saving and investment.

Closed Economy

An economy that does not engage in international trade, represented by the macroeconomic identity $Y = C + I + G$.

National Saving (S)

The total income in the economy that remains after paying for private consumption ($C$) and government consumption ($G$), expressed as $S = Y - C - G$.

Private Saving

The amount of income households have left after paying taxes ($T$) and consumption ($C$), calculated as $(Y - T - C)$.

Public Saving

The amount of tax revenue ($T$) the government has left after paying for its consumption ($G$), calculated as $(T - G)$.

Budget Surplus

A condition where tax revenue exceeds government spending ($T > G$), resulting in a public saving greater than zero.

Budget Deficit

A condition where government spending exceeds tax revenue ($T < G$), resulting in a public saving less than zero.

Investment (I)

The use of saving for the purpose of increasing the capital stock, consisting of investment into fixed capital and inventories (planned and unplanned).

Loanable Funds Market

The market in which those who want to save supply funds and those who want to borrow to invest demand funds, coordinated by financial markets.

Real Interest Rate

The price of a loan reflecting the amount borrowers pay and lenders receive, determined in the market for loanable funds.

Equilibrium Condition of the LF Market

The state where saving ($S$) equals investment into fixed capital plus planned investment into inventories ($I_{FC} + I_p$).

Unplanned increase in inventories

A situation where the real interest rate is higher than the equilibrium rate ($IR > IR_E$), causing demand to be lower than expected and $I_u > 0$.

Unplanned decrease in inventories

A situation where the real interest rate is lower than the equilibrium rate ($IR < IR_E$), causing demand to be higher than expected and $I_u < 0$.

Usury

The system of money lending on interest (also known as usura, riba, Wucher, or ростовщичество) which was historically illegal in Europe based on Natural law.

Theory of time preference

An economic justification for interest rates that views interest as a compensation for the lender postponing consumption.

Theory of liquidity preference

An argument for interest rates based on compensation for the lender giving up liquidity.

Emergent loss

An extrinsic title used to justify extra compensation in a loan for ex ante stated financial loss, such as notary fees or expected inflation.

Cessant gain

An extrinsic title used to justify extra compensation for ex ante stated sacrificed profit.

Investment tax credit

A government policy that increases the incentive to borrow, shifting the demand for loanable funds curve to the right and increasing the interest rate.

Crowding-out effect

The decrease in private investment that results from government borrowing to finance its budget deficit, which reduces the supply of loanable funds.

Government debt

The total accumulation of past government budget deficits.