HW Set 21: The market for loan-able funds

Price earnings ratio P/E

(price of a corporations stock) / (amount the corporation earned per share over the last year)

INC real interest rate

INC cost of borrowing DEC quantity of loanable funds demanded

Increase budget deficit

decreases public saving, dec national saving decrease supply of loanable funds, no change in the demand of loanable funds

Investment tax credit, firms receive tax break if they acquire physical capital

decreases taxes, increase return on investment, borrowing more attractive inc in the demand for loanable funds and no change in the supply of loanable funds, increase the real interest rate and increase supply of funds

Crowding out

increase government budget deficit, decrease in public saving, decrease national saving, increase interest rate, decrease investment, decrease production, decrease economic growth

Increase budget surplus

increase in public saving, increase in national saving, increase in the supply of loanable funds, and no change in the demand of laonable funds increaes public saving, national saving, decrease interst rate to increase investment, increase produciotn, more economic growth

How to change tax laws encourage Americans to save more

lower taxes on income increases return on saving, making saving more attractive more saving, more production, more economic growth

Other things the same, when the interest rate rises

people would want to lend more, making the quantity of loanable funds supplied increase

dividend yield

percent return the dividend (annual dividends per share / price per share )*100

true cost of borrowing money

real interest rate

Investment

source of the demand for loanable funds

Saving

the source of supply of loanable funds

LOW P/E

< 15 people expect firm's earnings to decrease in the future OR stock is undervalued

HIGH P/E

> 15 Corporations stock is expensive to the relative earnings people expect firm's earnings to increase in the future OR stock is overvalued

DEC real interest rate

DEC cost of borrowing INC quantity of loanable funds demanded