KRUGMAN'S MACROECONOMICS for AP* 29 Margaret Ray and David Anderson Module The Market for Loanable Funds.

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Presentation transcript:

KRUGMAN'S MACROECONOMICS for AP* 29 Margaret Ray and David Anderson Module The Market for Loanable Funds

What you will learn in this Module : 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

The Market for Loanable Funds The Market for Loanable Funds The Equilibrium Interest Rate Loanable Funds Market Nominal v. Real Interest Rate Rate of Return The laws of supply and demand explain the behavior of savers and borrowers

Equilibrium in the Loanable Funds Market Equilibrium in the Loanable Funds Market

Shifts of the Demand for Loanable Funds Shifts of the Demand for Loanable Funds ∆ Perceived Business Opportunities ∆ Government Borrowing Crowding-Out (government going out in the loanable funds market takes money away from others)

Shifts of the Supply of Loanable Funds Shifts of the Supply of Loanable Funds ∆ Private Savings Behavior ∆ Capital Inflows

Inflation and Interest Rates Inflation and Interest Rates Real Interest = Nominal Interest - Inflation r% = i% - π% The Fisher Effect- the expected real interest rate is unaffected by the change in expected future inflation. Nominal Interest = Real Interest + Expected Inflation i% = r% + exp. π%

Expected inflation is 0% so real=nominal=5% in equilibrium at point A Inflation and Interest Rates Inflation and Interest Rates Expected inflation is 0% so real=nominal=4 % in equilibrium at point Eo Borrowers and lenders all expect inflation to be 10%

Reconciling the Two Interest Rate Models: The Interest Rate in the Short Run Reconciling the Two Interest Rate Models: The Interest Rate in the Short Run

Reconciling the Two Interest Rate Models: The Interest Rate in the Long Run

Figure 29.1 The Demand for Loanable Funds Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 29.2 The Supply of Loanable Funds Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 29.3 Equilibrium in the Loanable Funds Market Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 29.4 An Increase in the Demand for Loanable Funds Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers

Figure 29.5 An Increase in the Supply of Loanable Funds Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers