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Econ 102 Chapter 9 - 17:22:00 Chapter 9 Market for loanable...

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21/10/2008 17:22:00 Chapter 9     Market for loanable funds: The interaction of borrowers and lenders that determines the market interest  rate and quantity of loanable funds exchanged. The market consists of: o Market for certificates of deposits at banks o The market for stocks o The Market for bonds o The market for mutual funds o And so on..? Demand and supply for loanable funds: Demand:  is determined by the willingness of firms to borrow money to  engage in new investment projects o In determining whether to borrow funds, firms compare the return they  expect to make on an investment with the interest rate they must pay. Supply:  is determined by the willingness of households to save and by the  extent of government saving or dissaving. o When households save, they reduce spending The higher the interest rate they receive when they lend their  funds to a savings account, the greater the reward to saving. Thus, it is upward sloping because the higher the interest rate,  the greater the quantity of saving supplied Because both borrowers and lenders are interested in the real interest rate  they will receive or pay, equilibrium in the market for loanable funds  determines the real interest rate rather than the nominal interest rate.  Equilibrium in Loanable funds graph: Determines the quantity of loanable funds that will flow from lenders to  borrowers each period.  Determines the real interest rate that lenders will receive and that borrowers  must pay
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