The Loanable Funds Market

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 (shifts right -->) Less borrowing = less demand for loanable funds (shifts left <--) Examples: Government deficit spending = more borrowing = more demand for loanable funds DLF -->(shifts right) therefore r%↑ Less investment demand = less borrowing = less demand for loanable funds DLF <--(shifts left) Therefore r%↓

Changes in the Supply of Loanable Funds

Remember that supply of loanable funds = saving (i.e. demand for bonds) More saving = more supply of loanable funds(--> Shifts right) Less saving = less supply of loanable funds (<-- Shifts left) Examples Government budget surplus = more saving = more supply of loanable funds SLF -->(shifts right) therefore r%↓ Decrease in consumers' MPS = less saving = less supply of loanable funds SLF <--(shifts left) therefore r%↑

Loanable Funds Market

The market where savers and borrowers exchange funds (QLF) at the real rate of interest (r%). The demand for loanable funds, or 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, government and the foreign sector. The supply of loanable funds is also the demand for bonds.

Final thoughts on Loanable Funds

Loanable funds market determines the real interest rate (r%). Loanable funds market relates saving and borrowing. Changes in saving and borrowing create changes in loanable funds and therefore the r% changes. When government does fiscal policy it will affect the loanable funds market. Changes in the real interest rate (r%) will affect Gross Private Investment