4.7 Loanable Funds Market

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6 Terms

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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

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Equilibrium real interest rate

amount borrowers want to borrow = amount lenders want to lend

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Demand of Loans

consumers, businesses, govt

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Supply of Loans

loanable money banks have ability and desire to lend

money comes from SAVERS

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Demand Shifters

  1. change in perceives business/consumer opportunities (more invest = more D)

  2. change in govt borrowing

    1. Budget deficit

    2. Budget surplus

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Supply Shifters

  1. Changes in SAVING behavior

  2. change in MS (MS incr = SL incr)

  3. change in foreign investment (more foreign = less supply)

  4. change in expected profitability of loans (for banks)