Unit 4 : Loanable Funds market

Loanable Funds Market
  • Market where savers and borrowers exchange funds (Q) at the real rate of interest (r%)
  • 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. 
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(→)
  • less borrowing = less demand for loanable funds(←)
  • Examples 
    • Government deficit spending = more borrowing = more demand for loanable funds 
      • ∴DLF →  r% ↑
    • Less investment demand  = less borrowing = less demand for loanable funds
      • ∴DLF ← r% ↓
Changes in Supply of Loanable Funds
  • Remember that supply of loanable funds = saving (i.e. demand for bonds)
  • More saving = more supply of loanable funds (→)
  • Less saving = less supply of loanable funds (←)
  • Examples
    • Government budget surplus = more saving = more supply for loanable funds 
      • ∴SLF→ r% ↓
    • Decrease in consumers' MPS = less saving = less supply of loanable funds 
      • ∴SLF ←  r%  ↑


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