Understanding the Loanable Funds Market: Demand and Supply Dynamics
This guide explores the loanable funds market, focusing on its graphical representation and the factors that shift demand and supply. It examines how businesses determine borrowing decisions based on interest rates, expected revenues, and profit margins. Moreover, it discusses elements that increase demand for loanable funds, such as perceived business opportunities, and those that boost supply, like private saving rates. Finally, it provides practice questions to reinforce understanding of these concepts, crucial for informed financial decision-making.
Understanding the Loanable Funds Market: Demand and Supply Dynamics
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Presentation Transcript
Unit Four: The Loanable Funds Market
IV. Practice • 1) A business will decide whether or not to borrow money to finance a project based on a comparison of the interest rate with the ___________ from its project. • Expected revenue • Profit • Rate of return • Cost generated • Demand generated
IV. Practice • 2) Which of the following will increase the demand for loanable funds? • A federal government budget surplus • An increase in perceived business opportunities • A decrease in the interest rate • Positive capital inflows • Decreased private saving rates
IV. Practice • Which of the following will increase the supply of loanable funds? • An increase in perceived business opportunities • Decreased government borrowing • An increased private saving rate • An increase in the expected inflation rate • A decrease in capital inflows
IV. Practice • 4) Both lenders and borrowers base their decisions on • Expected real interest rates. • Expected nominal interest rates. • Real interest rates. • Nominal interest rates. • Nominal interest rates minus real interest rates.
IV. Practice • Does each of the following affect either the supply or the demand for loanable, funds, and if so, does the affected curve increase (shift to the right) or decrease (shift to the left)? • There is an increase in capital inflows into the economy. • Businesses are pessimistic about future business conditions. • The government increases borrowing. • The private savings rate decreases.
