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ECON141.
CHAPTER 24.
Extra note
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Savers accumulateBorrowers want to make use of more funds
thanThe Loanable funds market brings savers
and
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Savers expect to earn a
Borrowers are willing to pay a premium to acquire funds
The interest rate is the price of
Stated as a percent of
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The market rate of interest is a nominal rate (i) -
Participants in the Loanable funds market are more interested in the
The real rate is the nominal rate adjusted for
Alternatively, i =
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Savers and borrowers focus on the expected
This equals the nominal rate minus the expected
r e = i -Lenders want to be compensated for lost
buying power, and borrowers are willing to
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Demand for Loanable funds depends on desire
Negatively related toSupply of Loanable funds
Slight positiveAssume e is constant when graphing the
loanable funds market.
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r
Loanable Funds
Investment
Saving
r0
LF0
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r
Loanable Funds
DLF
SLF
r0
LF0
SLF
1
r1
LF1
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r
Loanable Funds
DLF
SLF
r0
LF0
DLF1
r1
LF1
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r
Loanable Funds
DLF
SLF
r0
LF0
SLF
1
r1
LF1
Government retires debt, freeing savings to flow to private uses.
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r
Loanable Funds
DLF
SLF
r0
LF0
SLF1
r1
LF1
Government borrows more, reducing savings available for private uses.
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In reality, government budget deficits affect the real interest rate
Why?Foreign savings flow in, The Fed creates money, enabling banks to
make
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r
Loanable Funds
DLF
SLF
r0
LF0
DLF1
r1
LF1
Investment appears more profitable, so firms borrow more to buy capital goods.