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