Econ Chapter 7
Firms investment decisions
- firms invest in capital only if they expect to earn a profit - fewer projects are profitable at a higher real interest rate that at a low real interest rate - the higher the real interest rate the smaller is the quantity of loanable funds demanded other things remaining the same
Decrease in expected profit
Decreases the demand for loanable funds and brings a leftward shift of the demand for loanable funds curve
An increase in current income taxes
Decreases the supply of global fund say because it decreases disposable income which decreases saving
Loanable funds flow among countries because
Funds flow into the country with the highest real interest rate and out of the country in which the real interest rate is lowest
The loanable funds market is
The aggregate of all the individual financial market
Demand for loanable funds increases and the supply of loanable funds increases
The equilibrium real interest rate rises and the equilibrium quantity of loanable funds increases, decreases, or remains the same
The real interest rate is opportunity cost of loanable funds because
The real interest paid on borrowed funds is opportunity cost of borrowing and the real interest rate forgone is the opportunity cost of not saving or not lending those funds
The demand for loanable funds is determined by
The real interest rate and expected profit
The demand for loanable funds changes when
expected profit changes
If a country has a shortage of loanable funds at the world real interest rate
world suppliers of loanable funds move funds to this country
A government budget surplus ________ the supply loanable funds. The real interest rate _____, ______, decreases and ______ increases
Increases; falls; private savings; investment
A government budget deficit ________ the demand for loanable funds. The real interest rate ________, ________ increases, and _________ decreases.
Increases; rises; private saving; investment