It is the market where savers and borrows exchange funds (Qlf) at the real rate of interest (r%)- The demand for loanable funds, if borrowing, comes from households, firms, government and the foreign sector. The demand for loanable funds is in fact the supply of bonds.
- The supply of loanable funds, or savings comes from households, firms, govt and foreign sector. Supply of loanable funds is also demand for bonds.
Changes in the Demand for Loanable Funds
- Remember that demand for loanable funds = borrowing (i.e supplying bonds)
- More borrowing = more demand for loanable funds (--->)
- Vice versa for less borrowing
Examples
- Govt deficit spending = more borrowing = more demand = real interest rate would increase
- Vice versa for less spending
Change in the Supply of Loanable Funds
- Supply of loanable funds = saving (I.e. Demand for bonds)
- More saving = more supply (-->)
- Vice versa for less saving
Examples
- Govt budget surplus = more saving = more supply of loanable funds = real interest rate decrease
- Vice versa for budget deficit
Final Thoughts on Loanable Funds
- When govt does fiscal policy it will affect the loanable funds market
- Changes in real interest rate will affect Ig
0 comments:
Post a Comment