AP Economics Mr. Bernstein Module 29: The Market for Loanable Funds March 4, 2015

AP Economics Mr. 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 2

AP Economics Mr. Bernstein Equilibrium in the Loanable Funds Market D is downward sloping as rates fall, projects become 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 3

AP Economics Mr. Bernstein Shifts in Demand, Supply of Loanable Funds Shifts in Demand  in perceived business opportunities  in government borrowing (“Crowding Out”) Shifts in Supply  in private saving behavior  in capital inflows All shifts in Demand or Supply  Interest Rates…but… Real interest rates are not affected by changes in expected inflation (only nominal rates are affected…”The Fisher Effect”) 4

AP Economics Mr. Bernstein Inflation and Interest Rates  in Expected Inflation causes upward shift in D and in S New equilibrium at higher nominal rate but same expected real rate 5

AP Economics Mr. Bernstein Reconciling LPF with Loanable Funds Model 6

AP Economics Mr. Bernstein Reconciling LPF with Loanable Funds Model 7