LOANABLE FUNDS MARKET
- market where savers and borrowers exchange funds (QLF) at real rate of interest (r%)
- demand for loanable funds comes from or borrowing households, firms, governments, and foreign sector
- demand is supply of bonds
Demand
- equals borrowing (supplying bonds)
- more borrowing = more demand for loanable funds which is a shift to the right
- less borrowing = less demand for loanable funds which is a shift to the left
- ex: government deficit spending = more borrowing which is a shift to the right and r% will increase
Supply
- equals savings (demand bonds)
- more savings = more supply of loanable funds which is a shift to the right
- less savings = less supply of loanable funds which is a shift to the left
- ex: government budget surplus = more savings which is a shift to the right and r% will decrease
Final Thoughts
- When government does fiscal policy, it will affect the loanable funds market
- changes in real interest rate will affect Gross Private Investment
No comments:
Post a Comment