Chapter+10+-Loanable+Funds+Market

Chapter+10+-Loanable+Funds+Market - Study Guide To...

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Chapter 10 Study Guide To Accompany Macroeconomics: Theory and Policy By B. Modjtahedit Prepared by T. J. McCarthy and B. Modjtahedi University of California, Davis
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Key Points Loanable funds theory: interest rates are determined by the supply of and demand for loanable funds (amounts of loans) Unlike the supply of money and demand for money, these are flow variables (the amount of money people want to lend and borrow, respectively, not the actual and desired holdings of money) Equilibrium occurs when the demand for loanable funds equals the supply of loanable funds at the market interest rate
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r 1% 2% 3% 4% 5% 10 20 30 40 50 60 70 80 90 100 LF Demand for loanable funds: People can borrow money by issuing and selling bonds D LF Key Points As the interest rate decreases, the cost of borrowing decreases, so the quantity of loanable funds demanded increases. This is a movement along the curve.
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r 1% 2% 3% 4% 5% 10 20 30 40 50 60 70 80 90 100 LF Demand for loanable funds: People can borrow money by issuing and selling bonds D LF Key Points As the interest rate increases, the cost of borrowing increases, so the quantity of loanable funds demanded decreases. This is a movement along the curve.
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Key Points Factors other than the interest rate affecting the demand for loanable funds (+ and – signs indicate a positive or negative relationship, respectively, with demand for loanable funds) Expected inflation rate, π e (+) Expected future interest rate (+) Expected future economic conditions (+) Uncertainty about the level of future profits (–) Tax policy affecting firms’ profits (+ or –) Government budget deficit (+) Changes in any of these factors will cause a shift in the demand function.
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r 1% 2% 3% 4% 5% 10 20 30 40 50 60 70 80 90 100 LF D LF Key Points Increases in the following factors will increase the demand for loanable funds, causing the demand function to shift to the right. Expected inflation rate, π e (+) Expected future interest rate Favorable tax policy Expected future economic conditions (+) Government budget deficit (+)
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r 1% 2% 3% 4% 5% 10 20 30 40 50 60 70 80 90 100 LF D LF Key Points Increases in the following factors will decrease the demand for loanable funds, causing the demand function to shift to the left. Uncertainty about the level of future profits (–) Tax policy hurting firms’ profits (+ or –)
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r 1% 2% 3% 4% 5% 10 20 30 40 50 60 70 80 90 100 LF Supply of loanable funds: People can lend money by buying bonds Key Points As the interest rate increases, the rate of return for lending increases, so the quantity of loanable funds supplied increases. This is a movement along the curve. S LF
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r 1% 2% 3% 4% 5% 10 20 30 40 50 60 70 80 90 100 LF Supply of loanable funds: People can lend money by buying bonds Key Points As the interest rate decreases, the rate of return on lending decreases, so the quantity of loanable funds supplied decreases. This is a movement along the curve.
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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 - Study Guide To...

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