Additional Notes 3-4-25

Loanable Funds Demand

• Good Factors (Shift Demand Curve Right)

  • Increase in Expected Profitability of Capital: Encourages businesses to borrow funds for new investments.

  • Lower Business Taxes: Increases after-tax returns, leading firms to seek more funds for expansion.

• Bad Factors (Shift Demand Curve Left)

  • Decrease in Expected Profitability of Capital: Deters businesses from investing, leading to lower demand for loans.

  • Higher Business Taxes: Reduces after-tax profits, causing firms to borrow less.

Loanable Funds Supply

• Good Factors (Shift Supply Curve Right)

  • Increase in Wealth: More savings lead to higher availability of funds for lending.

  • Decrease in Risk: Investors are more willing to lend when risks are perceived to be lower.

  • Increase in Liquidity: More assets can be quickly converted into cash, increasing the supply of loanable funds.

  • Decrease in Information Costs: Easier access to information about borrowers leads to increased lending.

• Bad Factors (Shift Supply Curve Left)

  • Decrease in Wealth: Reduces funds available for loans, resulting in lower supply.

  • Increase in Risk: Heightens caution among lenders, decreasing willingness to lend.

  • Decrease in Liquidity: Assets that are hard to sell reduce the overall capacity to lend.

  • Increase in Information Costs: Higher costs of gathering information hinder lending activity.

Crowding Out

• The phenomenon where increased government borrowing leads to a decrease in private sector borrowing and investment due to higher interest rates.

Order of the Phases of the Business Cycle

• Phases:

  • Expansion: Period of economic growth.

  • Peak: The height of economic activity before a downturn.

  • Recession: Decline in economic activity.

  • Trough: The lowest point of economic activity before recovery begins.

• Cycle Repeats: Expansion, Peak, Recession, Trough, (repeats).