Loanable Funds Market - PowerPoint PPT Presentation

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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