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II. The Market for Loanable Funds

Course function | Course objectives | List of required textbooks and additional resources 1 страница | Lecture 1. A FIRST LOOK AT MACROECONOMICS | Lecture 2. MEASURING GDP AND ECONOMIC GROWTH | The Labor Market | IV. Why Labor Productivity Grows | Three Labor Market Indicators | Types of Unemployment | Constructing the CPI |


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  2. I. Financial Institutions and Financial Markets
  3. I. The Foreign Exchange Market
  4. III. Government in the Market for Loanable Funds
  5. IV. The Global Loanable Funds Market
  6. The Labor Market

The market for loanable funds is the aggregate of all the individual financial markets. In this market households, firms, governments, banks, and other financial institutions lend and borrow.

Funds that Finance Investment

I = S + (T - G) +(X - M).

This formula shows that investment is financed using private saving, a government budget surplus, (T - G) and borrowing from the rest of the world,(X - M).

· The sum of private saving, S, plus government saving, (T - G), is national saving.

· If we export less than we import, (X - M) is negative and we borrow (M - X) from the rest of the world.

· If we export more than we import, (X - M) is positive and we loan (X - M) to the rest of the world.

The Real Interest Rate

The Demand for Loanable Funds

· The real interest rate is the opportunity cost of loanable funds, so there is a negative relationship between the quantity of loanable funds demanded and the real interest rate.

· Investment is influenced by expected profit. The higher the expected profit, the more investment firms make. Expected profit rises during a business cycle expansion and falls during a business cycle recession; rises when technology advances; rises as the population grows; and fluctuates with swings in business optimism and pessimism.

The Supply of Loanable Funds

Equilibrium in the Market for Loanable Funds

Changes in Demand and Supply

· If expected profit increases the demand for loanable funds increases. The equilibrium real interest rate rises and the equilibrium quantity of loanable funds and investment increase.

· If the supply of loanable funds increases, the equilibrium real interest rate falls and the equilibrium quantity of loanable funds and investment increase.

· Short-run changes in the demand and supply can be sharp so that changes in the real interest rate also can be sharp. But in the long run the demand and supply grow at the same pace so there is no upward or downward trend in the real interest rate.


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