Chapter+10+_Loanable+Funds+Market_

Chapter+10+_Loanable+Funds+Market_ - Chapter 10 Loanable...

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Chapter 10 Loanable Funds Market 1
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Interest rate is determined by the supply and demand for loananble funds. 2 This is a flow theory
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Who Demands Loanable Funds? (Borrowers) Households – To buy homes, cars, appliances, pay for education, etc. Firms – To undertake investment: buy equipment, build or expand plants. Government – To finance its budget deficits 3
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Determinants of Demand r e r e Expected future economic conditions Uncertainty about the level of future profits Tax policy Government budget deficit 4
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r 0 1% LF 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 0% 15% Demand for Loanable Funds D LF
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Who Supplies Loanable Funds? (Lenders) Households – When their income exceeds their consumption. Firms – When they have excess cash. Government – When it runs a budget surplus. 6
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Determinants of Supply r e r e Income and wealth Credit risk 7
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r 0 1% LF 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 0% 15% Supply of Loanable Funds S LF S
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r 0 1% LF 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 0% 15% Equilibrium Interest Rate $8,000 S LF D LF
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r 0 1% LF 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 0% 15% Expected Future Profitability S LF D LF D
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Remember ?
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This note was uploaded on 04/03/2012 for the course ECN 001B 1b taught by Professor Baghermodjtahedi during the Spring '10 term at UC Davis.

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Chapter+10+_Loanable+Funds+Market_ - Chapter 10 Loanable...

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