Chapter 29 Loanable Funds Market Objective Students will

Chapter 29 - Loanable Funds Market Objective – Students will be able to answer questions regarding the loanable funds market. • 1 © 2001 by Prentice Hall, Inc. • SECTION • 1

Loanable Funds Market The market where savers and borrowers exchange funds (QLF) at the real rate of interest (r%). The demand for loanable funds, or borrowing comes from households, firms, government and the foreign sector. The supply of loanable funds, or savings comes from households, firms, government and the foreign sector.

Loanable Funds Market in Equilibrium r% SLF r DLF q QLF

Changes in the Demand for Loanable Funds Remember that demand for loanable funds = borrowing More borrowing = more demand for loanable funds ( ) Less borrowing = less demand for loanable funds ( )

Changes in the Demand for Loanable Funds Examples Government deficit spending = more borrowing = more demand for loanable funds. : DLF . : r%↑ Less investment demand = less borrowing = less demand for loanable funds. : DLF . : r%↓

Increase in the Demand for Loanable Funds r% SL F r 1 r DLF q q 1 DLF . : r% ↑ & QLF ↑ QL F DLF 1

Decrease in the Demand for Loanable Funds r% SL F r r 1 DLF 1 q DLF . : r% ↓ & QLF ↓ QLF DL F

1. Graph and explain what would happen to the equilibrium r% and QLF if there is an increase in investment demand. • 8

Changes in the Supply of Loanable Funds Remember that supply of loanable funds = saving More saving = more supply of loanable funds( ) Less saving = less supply of loanable funds ( )

Changes in the Supply of Loanable Funds Examples Government budget surplus = more saving = more supply of loanable funds. : SLF . : r%↓ Decrease in consumers’ MPS = less saving = less supply of loanable funds. : SLF . : r%↑

Increase in the Supply of Loanable Funds r% SL F SLF 1 r r 1 DLF q q 1 SLF . : r% ↓ & QLF ↑ QL F

Decrease in the Supply of Loanable Funds S r% LF 1 SL F r 1 r DL F q 1 q SLF . : r% ↑ & QLF ↓ QL F

Final thoughts on Loanable Funds Loanable funds market determines the real interest rate (r%). Loanable funds market relates saving and borrowing. Changes in saving and borrowing create changes in loanable funds and therefore the r% changes. When government does fiscal policy it will affect the loanable funds market. Changes in the real interest rate (r%) will

Section 1 Assessment 1. Graph and explain what would happen to the equilibrium r% and QLF if there is an increase in government deficit spending. 2. Graph and explain what would happen to the equilibrium r% and QLF if there is an increase in a societies MPS. • 14

Summary: In a paragraph, describe what you have learned today. • 15