Topic5

Introduction to Loanable Funds Market

• Course Context: Intro Macro, Spring 25, Topic 5

• Chapter: Discussion on Chapter 10

Interaction Overview

• Lecture Note: If lecture content differs from textbook, refer to lecture material.

• Textbook Limitation: Focuses on interactions between domestic households and firms.

  • Firms borrow funds from households.

  • Households provide loanable funds.

Major Financial Institutions

• Notable Banks:

  • Citi

  • HSBC

  • State Street

  • Barclays

National Saving and Investment

• Definition of Capital: Tools, instruments, machines, buildings produced in the past used for current production.

• Financial Capital: Funds used by firms for physical capital purchases.

Sources of Funds

1. Private Saving

   • Originates primarily from households.

2. Public Saving

   • Government surplus: when receipts exceed outlays.

   • Receipts = Tax revenue.

   • Outlays = Government purchases + transfer payments.

3. Borrowing from the Rest of the World

   • Trade deficit when imports exceed exports.

Historical Context

• Net Borrowing: Since early 1980s, U.S. has been a net borrower (except 1991).

National Saving and Investment Equations

• Closed Economy: [ I = S ]

• Open Economy: [ I = S + (M - X) ]

  • Where:

    • I = National Investment

    • S = National Saving

    • M = Imports

    • X = Exports

Loanable Funds Market Dynamics

• Types of Financial Capital Markets:

  • Stock markets

  • Bond markets (corporate and government bonds)

  • Loan markets (home loans, car loans)

  • Other markets: mutual funds.

Borrower and Lender Interaction

• Key Questions:

  • How do borrowers and lenders interact in a competitive market?

  • How is the price of borrowing determined?

Demand for Loanable Funds

• Who Demands Loanable Funds?:

  • Firms

  • Households

  • Foreign agents

  • Governments

  • Banks

• Common Borrowers: Businesses, home buyers, college students.

Price Dynamics in Loanable Funds Market

• Real Interest Rate: The price of loanable funds (or credit).

• Quantity of Loanable Funds: Amount lenders are willing to lend at a given real interest rate.

Shifts in Demand Curve

• Influenced by:

  • Business opportunities

  • Household expectations

  • Bank actions

  • Government policies

Supply of Loanable Funds

• Who Supplies Loanable Funds?:

  • Households

  • Firms

  • Governments

  • Banks

• Reasons for Saving:

  • Future expenses (retirement, large purchases, emergencies).

Market Equilibrium and Interest Rates

• Effect of Interest Rates:

  • Higher rates increase returns, potentially increasing savings but can have dual effects on saving behavior.

• Supply Curve Shifts: Factors include bank actions and government policies.

International Loanable Funds Market

• Definitions:

  • Net Borrower: Country that borrows more than it lends.

  • Net Lender: Country that lends more than it borrows.

• Global Interactions: Lenders look for highest interest rates; borrowers seek lowest.

• U.S. Status: Historically a net borrower since the early 1980s.

Practice Questions and Strategic Responses**

• Market Reactions:

  • Changes in business sentiment, lending practices, and household behavior can lead to adjustments in demand and supply curves, impacting interest rates and overall economic stability.