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Loanable Funds Market

Loanable Funds Market. ECON141. CHAPTER 24. Extra note. The Market for Loans. Savers accumulate Borrowers want to make use of more funds than The Loanable funds market brings savers and. The Price of Loanable Funds. Savers expect to earn a

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Loanable Funds Market

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  1. Loanable Funds Market ECON141. CHAPTER 24. Extra note

  2. The Market for Loans • Savers accumulate • Borrowers want to make use of more funds than • The Loanable funds market brings savers and

  3. The Price of Loanable Funds • Savers expect to earn a • Borrowers are willing to pay a premium to acquire funds • The interest rate is the price of • Stated as a percent of

  4. Nominal and Real Interest Rates • The market rate of interest is a nominal rate (i) - • Participants in the Loanable funds market are more interested in the • The real rate is the nominal rate adjusted for • Alternatively, i =

  5. … • Savers and borrowers focus on the expected • This equals the nominal rate minus the expected r e = i - • Lenders want to be compensated for lost buying power, and borrowers are willing to

  6. Loanable Funds Market • Demand for Loanable funds depends on desire • Negatively related to • Supply of Loanable funds • Slight positive • Assume pe is constant when graphing the loanable funds market.

  7. Graph of LF Market r Saving r0 Investment Loanable Funds LF0

  8. Introduce Tax-deferred Savings Accounts SLF r 1 SLF r0 r1 DLF LF0 LF1 Loanable Funds

  9. Introduce Investment Tax Credits SLF r r1 r0 1 DLF DLF LF0 LF1 Loanable Funds

  10. Increased GovernmentBudget Surplus(or smaller deficit) SLF r 1 SLF Government retires debt, freeing savings to flow to private uses. r0 r1 DLF LF0 LF1 Loanable Funds

  11. Increased Government Budget Deficit 1 SLF SLF r Government borrows more, reducing savings available for private uses. r1 r0 DLF LF1 LF0 Loanable Funds

  12. Caveats: Foreign Savings and Federal Reserve Policy • In reality, government budget deficits affect the real interest rate • Why? • Foreign savings flow in, • The Fed creates money, enabling banks to make

  13. Expected Capital Productivity Increases SLF r Investment appears more profitable, so firms borrow more to buy capital goods. r1 r0 1 DLF DLF LF0 LF1 Loanable Funds

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