Copyright © 2011 Cengage Learning 26 Saving, Investment, and the Financial System

Figure 1 The Market for Loanable Funds Loanable funds (in billions of euros) 0 Interest rate Supply Demand 5% €500 Copyright © 2011 Cengage Learning

Figure 2 An Increase in the Supply of Loanable Funds Loanable funds (in billions of euros) 0 Interest rate Supply,S1S1 S2S which reduces the equilibrium interest rate and raises the equilibrium quantity of loanable funds. Demand 1. Tax incentives for saving increase the supply of loanable funds... 5% € 500 4% € 600 Copyright © 2011 Cengage Learning

Figure 3 An Increase in the Demand for Loanable Funds Loanable funds (in billions of euros) 0 Interest rate 1. An investment tax credit increases the demand for loanable funds which raises the equilibrium interest rate and raises the equilibrium quantity of loanable funds. Supply Demand,D1D1 D2D2 5% € 500 6% € 600 Copyright © 2011 Cengage Learning

Figure 4 The Effect of a Government Budget Deficit Loanable funds (in billions of euros) 0 Interest rate and reduces the equilibrium quantity of loanable funds. S2S which raises the equilibrium interest rate... Supply,S1S1 Demand € 500 5% € 300 6% 1. A budget deficit decreases the supply of loanable funds... Copyright © 2011 Cengage Learning