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AP Economics

AP Economics. Mr. Bernstein Module 29: The Market for Loanable Funds February 2019. AP Economics Mr. Bernstein. The Market for Loanable Funds Objectives - Understand each of the following: How the loanable funds market matches savers and investors

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AP Economics

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  1. AP Economics Mr. Bernstein Module 29: The Market for Loanable Funds February 2019

  2. AP EconomicsMr. Bernstein The Market for Loanable Funds • Objectives - Understand each of the following: • How the loanable funds market matches savers and investors • The determinants of supply and demand in the loanable funds market • How the two models of interest rates can be reconciled

  3. AP EconomicsMr. Bernstein Equilibrium in the Loanable Funds Market • D is downward sloping • as rates fall, projects become more profitable • S is upward sloping • Must earn higher rates to forego consumption • Based on indiv. decisions, unlike vertical MS line • Y axis: Real Interest Rate

  4. AP EconomicsMr. Bernstein Shifts in Demand, Supply of Loanable Funds • Shifts in Demand • D in perceived business opportunities • D in government borrowing (“Crowding Out”) • Shifts in Supply • D in private saving behavior • D in capital inflows • All shifts in Demand or Supply D Interest Rates…but… • Real interest rates are not affected by changes in expected inflation (only nominal rates are affected…”The Fisher Effect”)

  5. AP EconomicsMr. Bernstein Inflation and Interest Rates • D in Expected Inflation causes upward shift in D and in S • New equilibrium at higher nominal rate but same expected real rate

  6. AP EconomicsMr. Bernstein Reconciling LPF with Loanable Funds Model

  7. AP EconomicsMr. Bernstein Reconciling LPF with Loanable Funds Model

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