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AP Economics
Mr. Bernstein
Module 29: The Market for Loanable Funds
March 4, 2015
2
AP EconomicsMr. Bernstein
The Market for Loanable Funds• Objectives - Understand each of the following:• How the loanable funds market matches savers and
investors• The determinants of supply and demand in the
loanable funds market• How the two models of interest rates can be reconciled
3
AP EconomicsMr. Bernstein
Equilibrium in the Loanable Funds Market• D is downward sloping• as rates fall, projectsbecome more profitable
• S is upward sloping• Must earn higher rates to forego consumption• Based on indiv. decisions,unlike vertical MS line
• Y axis: Real Interest Rate
4
AP EconomicsMr. Bernstein
Shifts in Demand, Supply of Loanable Funds• Shifts in Demand
• D in perceived business opportunities• D in government borrowing (“Crowding Out”)
• Shifts in Supply• D in private saving behavior• D in capital inflows
• All shifts in Demand or Supply D Interest Rates…but…• Real interest rates are not affected by changes in
expected inflation (only nominal rates are affected…”The Fisher Effect”)
5
AP EconomicsMr. Bernstein
Inflation and Interest Rates• D in Expected
Inflation causesupward shift in Dand in S
• New equilibriumat higher nominalrate but same expected real rate
6
AP EconomicsMr. Bernstein
Reconciling LPF with Loanable Funds Model
7
AP EconomicsMr. Bernstein
Reconciling LPF with Loanable Funds Model