Slides Created By Kevin Brady and Eric Chiang Market for Loanable Funds Interactive Examples To...

Slides Created By

Kevin Brady and Eric Chiang

Market for Loanable Funds

Interactive Examples

To navigate, please click the appropriate green buttons.(Do not use the arrows on your keyboard)

Material from this presentation can be found in:

Chapter 22

CoreEconomics, 2e

Begin


Real Interest Rate(%)

Loanable Funds

(in millions)

The market for loanable funds is a simple model that describes the financial market for saving and investment.

Back

2000 4000 6000 8000 10000

1

2

3

4


In particular, it describes the relationship between loanable funds and the real interest rate.

Next

5


Loanable Funds

(in millions)

Question: Where does the supply of loanable funds come from?

Back

2000 4000 6000 8000 10000

1

2

3

4


5

Answer



Loanable Funds

(in millions)

Question: Where does the supply of loanable funds come from?

Back

2000 4000 6000 8000 10000

1

2

3

4


Next

5

Answer: Savers! People supply funds to the loanable funds market because they do not spend all of their income.



Loanable Funds

(in millions)

Question: What does the supply of loanable funds curve look like?

Back

2000 4000 6000 8000 10000

1

2

3

4


5

Answer



Loanable Funds

(in millions)

Question: What does the supply of loanable funds curve look like?

Back

2000 4000 6000 8000 10000

1

2

3

4


Next

5

Answer: It is upward sloping. As real interest rates increase, people are willing to save more because they earn a higher rate of return on their savings.

S0

At an interest rate of 3%, $5 billion in loanable funds will be available. At an interest rate of 4%, $8 billion in loanable funds will be available.

5000



Loanable Funds

(in millions)

Question: Where does the demand for loanable funds come from?

Back

2000 4000 6000 8000 10000

1

2

3

4


5

Answer



Loanable Funds

(in millions)

Question: Where does the demand for loanable funds come from?

Back

2000 4000 6000 8000 10000

1

2

3

4


Next

5

Answer: Investors, entrepreneurs, and consumers. People demand loanable funds in order to make investments, start new companies, or make ordinary purchases.



Loanable Funds

(in millions)

Question: What does the demand for loanable funds curve look like?

Back

2000 4000 6000 8000 10000

1

2

3

4


5

Answer



Loanable Funds

(in millions)

Question: What does the demand for loanable funds curve look like?

Back

2000 4000 6000 8000 10000

1

2

3

4


Next

5

Answer: It is downward sloping. As real interest rates decrease, people are willing to borrow more money because the cost of borrowing is lower.

D0

At an interest rate of 4.5%, $3 billion in loanable funds will be demanded. At an interest rate of 2.5%, $7 billion in loanable funds will be demanded.

3000 7000



Loanable Funds

(in millions)

Question: What determines equilibrium in the loanable funds market?

Back

2000 4000 6000 8000 10000

1

2

3

4


5

Answer



Loanable Funds

(in millions)

Question: What determines equilibrium in the loanable funds market?

Back

2000 4000 6000 8000 10000

1

2

3

4


Next

5

Answer: Equilibrium occurs where the supply of loanable funds curve crosses the demand for loanable funds curve.

S0

D0

In the graph to the right, this occurs at a real interest rate of 3% and loanable funds of $6 billion.



Loanable Funds

(in millions)

Question: What if the people in this economy heed the President’s rallying cry of “spend more, save less”?

Back

2000 4000 6000 8000 10000

1

2

3

4


5

S0

D0

Answer



Loanable Funds

(in millions)

Question: What if the people in this economy heed the President’s rallying cry of “spend more, save less”?

Back

2000 4000 6000 8000 10000

1

2

3

4


Next

5

S0

D0

Answer: People in the economy will supply less loanable funds at every interest rate. Thus, the supply curve for loanable funds will shift to S1.

S1

5000

3.5

In the graph to the right, the new equilibrium will be at real interest rate of 3.5% and a loanable funds quantity of $5 billion.



Loanable Funds

(in millions)

Question: What would happen in the loanable funds market if Congress decides to increase taxes on businesses in order to pay down the national debt?

Back

2000 4000 6000 8000 10000

1

2

3

4


5

S0

D0

Answer



Loanable Funds

(in millions)

Question: What would happen in the loanable funds market if Congress decides to increase taxes on businesses in order to pay down the national debt?

Back

2000 4000 6000 8000 10000

1

2

3

4


Next

5

S0

D0

Answer: The increase in taxes will cause businesses to reduce investment, and thus decrease the demand for loanable funds at each interest rate. The D0 curve will shift to the left.

D1

5000

2.75




Loanable Funds

(in millions)

Question: A technology is created that will allow newly-built planes to travel at twice their current speed. What effect would this have on the loanable funds market?

Back

2000 4000 6000 8000 10000

1

2

3

4


5

S0

D0

Answer



Loanable Funds

(in millions)

Question: A technology is created that will allow newly-built planes to travel at twice their current speed. What effect would this have on the loanable funds market?

Back

2000 4000 6000 8000 10000

1

2

3

4


Next

5

S0

D0

Answer: The new product and technology will increase the demand for loanable funds as firms race to enter this market. The D0 curve will shift to the right.

D1

3.75




Loanable Funds

(in millions)

Question: The national headlines show that the unemployment rate has been rising and it is expected to continue rising. What effect might this have on the loanable funds market?

Back

2000 4000 6000 8000 10000

1

2

3

4


5

S0

D0

Answer



Loanable Funds

(in millions)

Question: The national headlines show that the unemployment rate has been rising and it is expected to continue rising. What effect might this have on the loanable funds market?

Back

2000 4000 6000 8000 10000

1

2

3

4


5

S0

D0

Answer: The headlines will cause people in the economy to be nervous about losing their jobs. They will be willing to save more at each interest rate, shifting the S0 curve to S1.

S1

7000

2.5


Start Over


Slides Created By Kevin Brady and Eric Chiang Market for Loanable Funds Interactive Examples To...

Documents

Transcript of Slides Created By Kevin Brady and Eric Chiang Market for Loanable Funds Interactive Examples To...