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Loanable Funds Market Graph
shows long run changes
private sector supply & demand of LOANS
shows effect on REAL interest rate
banks’ perspective
Demandborrowers - INVERSE relationship b/w RIR and quantity loans demanded
Supplylenders - DIRECT relationship b/w RIR and quantity loans supplied
supply is not vertical bc banks decide how much to loan out
Equilibrium real interest rate
amount borrowers want to borrow = amount lenders want to lend
Demand of Loans
consumers, businesses, govt
Supply of Loans
loanable money banks have ability and desire to lend
money comes from SAVERS
Demand Shifters
change in perceives business/consumer opportunities (more invest = more D)
change in govt borrowing
Budget deficit
Budget surplus
Supply Shifters
Changes in SAVING behavior
change in MS (MS incr = SL incr)
change in foreign investment (more foreign = less supply)
change in expected profitability of loans (for banks)