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Loanable funds

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Loanable funds Presentation Transcript

  • 1. Loanable Funds Market
  • 2. The Market for Loans
    • Market for loanable funds is the market in which those who want to save supply funds and …
    • those who want to borrow to invest demand funds.
  • 3.
    • Saving is the source of the supply of loanable funds
    • Investment is the source of the demand for loanable funds
  • 4. The Price of Loanable Funds
    • The interest rate is the price of the loan
    • It represents the amount that borrowers pay for loans and the amount that lenders receive on their savings.
  • 5. Demand for loanable funds
    • Demand for funds comes from households and businesses who wish to borrow to make investments.
    • High interest makes borrowing more expensive, the quantity of loanable funds demanded falls as interest rates rise.
    • Mortgages, new equipment or factories
  • 6. Supply of Loanable Funds
    • Supply comes from those who have extra money to save or lend out.
    • This lending can occur directly such as the purchase of a bond or indirectly as savings.
    • High interest rates make saving more attractive
  • 7. Interest Rate
    • Nominal interest rate is the interest rate as usually reported – the monetary return to saving and cost of borrowing.
    • The real interest is the interest corrected for inflation; it equals the nominal-inflation.
    • Real interest more accurately reflects the real return to savings or cost of borrowing.
    • Supply and demand for loanable funds depends on real interest rate
  • 8. Graph of LF Market r Loanable Funds Investment Saving r 0 LF 0
  • 9. Shifts in the supply curve
    • Saving incentives
      • Laws that encourage greater savings
      • A tax change that would alter the incentive on households to save at any given interest rate would affect the quantity of loanable funds supplied at each rate.
      • Savings would increase and the supply of loanable funds would shift right.
  • 10. Introduce Tax-deferred Savings Accounts r Loanable Funds D LF S LF r 0 LF 0 S LF 1 r 1 LF 1 Tax incentives for savings increase the supply of loanable funds… ...which reduces the interest rate.. .. and raises the quantity of loanable funds.
  • 11. Introduce Investment Tax Credits –Increase in demand r Loanable Funds D LF S LF r 0 LF 0 D LF 1 r 1 LF 1 An investment tax credit (makes investment like building new factories more attractive) increases the demand for loanable funds… … which raises the equilibrium interest rate and greater saving… … which raises the equilibrium quantity of loanable funds.
  • 12. Increased Government Budget Surplus (or smaller deficit) r Loanable Funds D LF S LF r 0 LF 0 S LF 1 r 1 LF 1 Government retires debt, freeing savings to flow to private uses.
  • 13. Increased Government Budget Deficit: Crowding Out r Loanable Funds D LF S LF r 0 LF 0 S LF 1 r 1 LF 1 Government borrows more, reducing savings available for private uses.
  • 14. Budget Deficit
    • In reality, government budget deficits affect the real interest rate.
    • When the government reduces national savings by running a budget deficit, the interest rate rises, and investment falls.
    • Because investment is important for long –run economic growth, government budget deficits reduce economy’s growth rate.
  • 15. Expected Capital Productivity Increases r Loanable Funds D LF S LF r 0 LF 0 D LF 1 r 1 LF 1 Investment appears more profitable, so firms borrow more to buy capital goods.