Loanable Funds

Loanable Funds - Interest Rate Loanable Funds ($billions)...

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THE MARKET FOR LOANABLE FUNDS
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2 A supply-demand model of the financial system Helps us understand how the financial system coordinates saving & investment how government policies and other factors affect saving, investment, the interest rate The Market for Loanable Funds
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3 Assume: only one financial market All savers deposit their saving in this market. All borrowers take out loans from this market. There is one interest rate, which is both the return to saving and the cost of borrowing. The Market for Loanable Funds
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4 The Market for Loanable Funds The supply of loanable funds comes from saving: Households with extra income can loan it out and earn interest. Public saving, if positive, adds to national saving and the supply of loanable funds. If negative, it reduces national saving and the supply of loanable funds.
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5 The Slope of the Supply Curve
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Unformatted text preview: Interest Rate Loanable Funds ($billions) Supply An increase in the interest rate makes saving more attractive, which increases the quantity of loanable funds supplied. 60 3% 80 6% 6 The Market for Loanable Funds The demand for loanable funds comes from investment: Firms borrow the funds they need to pay for new equipment, factories, etc. Households borrow the funds they need to purchase new houses. 7 Interest Rate Loanable Funds ($billions) Demand A fall in the interest rate reduces the cost of borrowing, which increases the quantity of loanable funds demanded. 50 7% 4% 80 The Slope of the Demand Curve 8 Equilibrium Interest Rate Loanable Funds ($billions) Demand The interest rate adjusts to equate supply and demand. Supply The equil. quantity of loanable funds equals equil. investment and equil. saving. 5% 60...
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This note was uploaded on 02/28/2011 for the course ECON 011 taught by Professor Yezer during the Spring '07 term at GWU.

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Loanable Funds - Interest Rate Loanable Funds ($billions)...

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