econ ch 9
The notion of consumption smoothing means
consumption varies less than income over a person's lifetime. In early life people tend to borrow, in late life people tend to dissave, but in their middle years they tend to save.
what do lower interest rates lead to?
greater quantity demanded for loanable funds
investor confidence
is a measure of what firms expect for future economic activity
interest rate
is a price of loanable funds, quoted as a percentage of the original loan amount
savings rate
is personal saving as a portion of disposable (after-tax) income
nominal interest rate
is the interest rate before it is corrected for inflation
real interest rate
is the interest rate that is corrected for inflation
loanable funds market
is the market where savers supply funds for loans to borrowers
when decision makers at firm lose confidence in the future direction of the economy what happens to demand?
it declines and lower investment is the result
if income and wealth increase, time preferences fell, and a large population moves into midlife what happens?
it would all increase savings moving it to the right
if income and wealth decrease, time preferences rise, and no one moves into midlife what happens?
it would decrease savings and move it to the right
higher inflation rates lead to higher?
nominal interest rates
equilibrium
occurs at the interest rate where the plans of savers match the plans of borrowers
consumption smoothing
occurs when people borrow and save in order to smooth consumption over their lifetime
dissaving
occurs when people withdraw funds from their previously accumulated savings
what factors shift demand for loanable funds?
productivity of capital and investor confidence
time preferencing
refers to the fact that people prefer to receive goods and services sooner rather than later
If the demographics of a nation change and the average age of the nation is approaching middle age, we would expect
savings to increase
As income and wealth rise, we would expect
savings to increase as people save some of the extra wealth or income they have
fisher equation
states that the real interest rate equals the nominal interest rates minus the inflation rate
what happens when baby boomers retire and draw down their savings?
supply loanable funds market will decrease
If the U.S. economy experiences a major recession, then
the demand for loanable funds will shift left
if capital is more productive what happens to demand?
the demand for loans increase; if it is less productive the demand for loans decrease
The demand for loanable funds decreases while the supply simultaneously increases. This would cause:
the equilibrium interest rate to decrease, but the new equilibrium quantity would be uncertain.
If household wealth rises and capital becomes less productive, we would correctly say that:
the new equilibrium quantity of loanable funds would be indeterminate, but we would be certain the new equilibrium interest rate would be less than the original.
law of supply for loanable funds
the quantity of savings rises when the interest rates rises
Assume foreign incomes rise. Ceteris paribus (all things equal), this would cause:
the supply of loanable funds to increase.
If time preferences increase
the supply of loanable funds will decrease.
One could correctly argue that higher capital productivity
would increase the value of capital and the demand for loanable funds
You borrow $10,000 today at a nominal rate of 5%; inflation for the past 10 years has been exactly 2%. Today, inflation instantly rises to 4% and stays that way for the duration of your loan. Based on the above information and all else being equal, today
you are better off because you are paying back the loan with dollars that represent less purchasing power today than the dollars you borrowed before
what factors shift supply of loanable funds?
Income and wealth, time preferences, consumption smoothing
Which combination of events could have caused the equilibrium interest rate to fall and the equilibrium quantity of loanable funds (both borrowed and lent) to rise?
More individuals are middle aged, and wealth increases
The demand for loanable funds increases while the supply of loanable funds remains constant. This would cause:
both the equilibrium quantity of loanable funds and the equilibrium interest rate to increase.
if investor confidence rises what happens to demand
demand for loanable funds increases and the demand curve moves to the right.
Since firms are the primary
demanders of loanable funds, they must borrow from households