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Loanable funds

Loanable funds






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    Loanable funds Loanable funds Presentation Transcript

    • Loanable Funds Market
    • 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.
      • Saving is the source of the supply of loanable funds
      • Investment is the source of the demand for loanable funds
    • 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.
    • 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
    • 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
    • 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
    • Graph of LF Market r Loanable Funds Investment Saving r 0 LF 0
    • 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.
    • 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.
    • 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.
    • 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.
    • 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.
    • 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.
    • 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.