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AP Macroeconomics

AP Macroeconomics. The Loanable Funds Market. Loanable Funds Market. The market where savers and borrowers exchange funds (Q LF ) at the real rate of interest (r %). Demand of Loanable Funds.

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AP Macroeconomics

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  1. AP Macroeconomics The Loanable Funds Market

  2. Loanable Funds Market • The market where savers and borrowers exchange funds (QLF) at the real rate of interest (r%).

  3. Demand of Loanable Funds • The demand for loanable funds, or borrowing comes from households, firms, government and the foreign sector. • The demand for loanable funds is in fact the supply of bonds.

  4. Supply of Loanable Funds • The supply of loanable funds, or savings comes from households, firms, government and the foreign sector. • The supply of loanable funds is also the demand for bonds.

  5. Loanable Funds Market in Equilibrium r% SLF & DBonds r DLF & SBonds QLF q

  6. Changes in the Demand for Loanable Funds • Remember that demand for loanable funds = borrowing (i.e. supplying bonds) • More borrowing = more demand for loanable funds () • Less borrowing = less 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%↓

  7. Increase in the Demand for Loanable Funds r% SLF r1 r DLF 1 DLF QLF q q1 DLF .: r% ↑ & QLF↑

  8. Decrease in the Demand for Loanable Funds r% SLF r r1 DLF DLF 1 QLF q1 q DLF .: r% ↓ & QLF ↓

  9. Changes in the Supply of Loanable Funds • Remember that supply of loanable funds = saving (i.e. demand for bonds) • More saving = more supply of loanable funds() • Less saving = less 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%↑

  10. Increase in the Supply of Loanable Funds r% SLF SLF 1 r r1 DLF QLF q q1 SLF .: r% ↓ & QLF↑

  11. Decrease in the Supply of Loanable Funds SLF 1 r% SLF r1 r DLF QLF q q1 SLF .: r% ↑ & QLF ↓

  12. 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 affect Gross Private Investment

  13. Final thoughts on Loanable Funds (cont) • When government does fiscal policy it will affect the loanable funds market. • Changes in the real interest rate (r%) will affect Gross Private Investment

  14. Effect of Expansionary Fiscal Policy on Loanable Funds & Investment SLF r% r% r1 r DLF 1 ID DLF IG q q1 QLF I I1 G↑ and/or T↓ .: Government deficit spends .: DLF .: r%↑ .: IG↓ (Crowding-Out Effect)

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