Market for Loanable Funds

indirect finance

flow of funds from savers to borrowers through intermediaries such as banks.

relationship of the supply loanable funds

funds is the relationship between the quantity of loanable funds supplied and the real interest rate when all other influences on lending plans remain the same. The real interest rate is the opportunity cost of consumption expenditure.

Financial Institutions

it is a firm that operates on both sides of the markets for financial capital: It borrows in one market and lends in another. Some examples of financial institutions are : • Investment banks • Commercial banks • Government-sponsored mortgage lenders • Pension funds • Insurance companies

The loanable funds market

it is the aggregate of the markets for loans, bonds, and stocks.

savings

not consuming all income

financial investment

purchasing financial securities such as stocks and bonds

investment

the production and purchase of capital goods such as buildings, machines, equip that can be used to produce more goods and services in the future

savings

Source of funds to finance investment

<The Demand for Loanable Funds

The Demand for Loanable Funds The quantity of loanable funds demanded is the total quantity of funds demanded to finance investment, the government budget deficit, and international investment or lending during a given period. Investment depends on 1. The real interest rate (cost of the funds ) (changes the demand within the line) 2. Expected profit (shifts the demand line right or left)

changes in the supply of loanable funds

The four main factors that influence saving and change the supply of loanable funds are 1. Disposable income 2. Wealth 3. Expected future income 4. Default risk

<The Supply of Loanable Funds

The quantity of loanable funds supplied is the total funds available from private saving, the government budget surplus, and international borrowing during a given period. Saving is the main item and it depends on 1. The real interest rate 2. Disposable income 3. Wealth 4. Expected future income 5. Default risk

The Supply of Loanable Funds

The supply of funds represents the desire of lenders to lend, including banks, credit card companies, and includes purchases of U.S. Treasury Securities, municipal securities, corporate bills, notes and bonds, and any other debt assets.

funds to finance investment are supplied and demanded by 3 types of markets:

1. bond market 2. stock market 3. loan market (through intermediaries)

loanable funds are used for

1. business investments 2. government budget deficit 3. international investment or lending

source of loanable funds

1. private saving 2. government budget surplus 3. international borrowing

owners of small business have 3 ways to raise funds

1. reinvest your profit, called retained earnings 2. recruiting additional owners that will invest capital 3. by borrowing from friends, family and friends

disposable income

Increase= shift to the right decrease= shift to the left

sources of external funds

It is the role of an economy's financial system to transfer funds from savers to borrowers either directly or indirectly.

direct finance

a flow of funds from savers to firm through financial markets

expected future income

increase= shift to the left decrease= shift to the right

risk

increase= shift to the left decrease= shift to the right

wealth

increase= shift to the left. because people save less decrease= shift to the right