Loanable Funds And the Money Market

Warm Up 5 th period = If your last name goes from Bialaszewski to Medart-Thompson, you will sit together on the side of the room closest to the door If your last name goes from Muñoz to Von Dohlen, you will sit together in the middle of the room 6 th period = In groups of 5, your group will be given a warm up question that your AND ONLY YOUR group will answer for the class Don’t mess up!

Warm Up Group 1: What is the time value of money equation? PV = FV/(1+r)ⁿ Group 2: What is included in the concept of M1? Paper currency, coins, and checkable deposits Group 1/Group 3: If you are getting compounded interest, you are going to (multiply/divide) in the equation? Multiply

Warm Up Group 2/Group 4: Banks are required by law to keep a fraction of their deposits on hand. What is this fraction called? Required reserves Group 1/Group 5: If a checkable deposit of $1,000 is dropped off at a bank, and they have a 10% required reserve, what dollar amount will be loaned out? $900 Group 2/Group 6: What is the equation for the deposit expansion multiplier? DEM = 1/rr rr = reserve requirement

Loanable Funds Definition = all forms of credit, including loans, bonds, or savings deposits. The sum total of all of the money people have decided to save and lend out to borrowers as an investment rather than used for personal consumption o Classical theory The loanable funds doctrine = the interest rate is determined by the demand for and supply of loanable funds

Loanable Funds Market The loanable funds market is made up of borrowers who demand funds (D lf ) and lenders who supply funds (S lf ) The market determines the real interest rate (the price of loans)

Demand Curve The demand curve for loanable funds is negatively sloped Why? More loans are demanded at lower real interest rates, and fewer loans are demanded at higher interest rates Duh :P

Supply Curve The supply curve for loanable funds is upward sloping because households are willing to save their money Which means the opportunity cost is now spending (households are giving up spending in order to save) Higher rates of interest are needed to compensate for the increased opportunity cost of saving

Equilibrium Point There is an equilibrium real interest rate The total amount savers are willing to lend equals the total amount that borrowers are willing to borrow o Major determinants are: o Business confidence o Expectations o Consumer confidence o Government budget plans o Income levels

Shifting Curves Holy shifting curves, Batman! What would cause the demand curve shift to the right? The demand for loans grew People are comfortable with a 7% interest rate (like the government) since the rate is still low

Videos Loanable Funds Mr. Clifford

Money Market The quantity of money (M1) is determined by the Federal Reserve The money market consists of the demand for money (MD) and the supply of money (MS) Since the quantity of money is supplied by the Federal Reserve, the money supply is completely independent of the interest rate, which means the graph looks like this…

Money Market The money supply (MS) line is vertical The demand for money (MD) is based on consumers’ decisions to hold wealth through interest-bearing assets (savings accounts) or as money The demand curve slopes downwards because it represents the quantity of money demanded at various interest rates

Types of Demand Transactions demand = to make purchases of goods and services Precautionary demand = to serve as protection against an unexpected need Speculative demand = to serve as a store of wealth

Shifting Curves The money supply curve can shift when there is an increase in the money supply (like loans)

Shifting Curves The demand curve can shift when a demand for money increases (like loans)

Videos Money Market Money Market 2

Stock Detectives In your same groups, using your phones, you will find articles about what is happening in the stock market today (either here or abroad). 5 th period = find 4 different stock articles, read them, and give the class a brief overview of what they say 6 th period = 2 articles per group

Poster On the poster at the front of the room, send a representative to write on the poster: The company name or stock item ↑ or ↓ if the stock rose or fell

Observations What are your observations? Because our chart looks like this, what does this mean for the world economy at a glance? Would you still invest in these stocks in the future? Why or why not?