Loanable Funds Market and Phillips Curve Practice

Unit 4 and 5 MacroEconomics

Why is the supply of money vertical?

The Supply of Money is vertical because the Central Bank sets the amount of money available without evaluating the value of money first. KEY: Interest rate doesn’t affect the supply of money (the Fed (Central Bank) does via Monetary Policy).

What shifts the supply of money?

The supply of money has these shifters: the reserve requirement, the discount rate, open market operations (the buying and selling bonds), and the federal funds rate. KEY: The Fed via Monetary Policy (increase or decrease in money supply through various strategies).

Why is the supply of loanable funds upward sloping?

The supply of loanable funds are upward sloping because the higher the interest rate, the more willing suppliers of loanable funds will be to lend money. KEY: There is a direct relationship between real interest rate and quantity of loans supplied (savers save more when real interest rates are high b/c they get a greater return on their money from the bank so there is more money available to loan out from banks; lenders loan more when real interest rates are high because they get more money back).

What shifts the supply of loanable funds?

The supply of loanable funds shifts because of private savings behavior and capital flows. The loanable funds market model is used to simplify what happens in the economy when borrowers and lenders interact. KEY: Changes in private savings behavior Changes in public savings Changes in foreign investment (ex: more inflow of foreign financial capital)

Why is the demand for money downward sloping?

The demand for money is downward sloping because as the value of money decreases, consumers must make more money to purchase goods and services that become more expensive. KEY: As interest rates decrease, there is a lower opportunity cost associated with holding money in your pocket or checking account.

What shifts the demand for money?

The demand for money shifts due to the level of income and real GDP, price level, expectations, transfer costs, and preferences. KEY: Changes in price level (people need more to buy stuff) Changes in Income (more or less in hand), Technology (ex: increase in the use of cards leads to a decrease in the demand for money)

Why is the demand for loanable funds downward sloping?

The demand for loanable funds is downward sloping because the higher the interest rate, the less the demand for borrowing money. KEY: There is an inverse relationship between real interest rate and quantity loans demanded (when real IR is low, there is an increased incentive or demand to borrow money at lower interest rate and vice versa)

What shifts the demand for loanable funds?

The demand for loanable funds is shifted when deficits increase the demand for loanable funds; surpluses decrease the demand for loanable funds. The logic of this point of view is that if the government runs a deficit, it has to borrow money as well. KEY: Changes in borrowing by consumers changes in borrowing by businesses (investment spending) Changes in borrowing by the government

What kind of interest rate is on the money market graph?

nominal interest rates!

What kind of interest rate is on the loanable funds graph?

real interest rates!