Loanable funds market

Changes in the Demand for Loanable Funds

It is the market where savers and borrows exchange funds (Qlf) at the real rate of interest (r%)

• The demand for loanable funds, if 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, govt and foreign sector. Supply of loanable funds is also demand for bonds.

• Remember that demand for loanable funds = borrowing (i.e supplying bonds)
• More borrowing = more demand for loanable funds (--->)
• Vice-versa for less borrowing

Examples:

• Govt deficit spending = more borrowing = more demand = real interest rate would increase
• Vice versa for less spending

Change in the Supply of Loanable Funds:

• Supply of loanable funds = saving (I.e. Demand for bonds)
• More saving = more supply (-->)
• Vice versa for less saving

Examples:

• Govt budget surplus = more saving = more supply of loanable funds = real interest rate decrease
• Vice-versa for budget deficit

Final Thoughts on Loanable Funds:

• When government does fiscal policy it will affect the loanable funds market
• Changes in real interest rate will affect Ig