1. Market for Loanable Funds
Crowding Out: What happens when a country’s debt gets too big?

2. Who are SAVERS in Economics? Who are INVESTORS in Economics?
Consumers who have “extra money”
They buy bonds, stocks, etc… to maintain/increase purchasing power
Business who needs money to expand (I↑)
They sell bonds, stocks, to expand business

3. Savers & Investors Loanable Funds is where savers & investors meet
Savers buy securities (bonds) to earn interest
Investors borrow money for capital investment
Savers = Supply curve of loanable funds
Private savings = Firms & households savings
Public savings = government savings (it can be negative!)
National Savings = Public & Private savings
Investors = Demand curve for loanable funds (need to borrow money)
Business demands loans for capital investment (“I” in GDP)
Borrow $ & pay interest to savers

4. Loanable Funds Market Is an economic model of interest rates
It is not the short term interest rate the Fed sets
It is a “free market” longer term interest rate
S & D determines this real interest rate
It is meant to simulate “real” debt (bond) markets:
Corporate Bonds, Mortgage Bonds etc…..

5. Shifting Loanable Funds
Corporations become more confident about the economy
Are they Supply or Demand in the loanable funds market?
Business is the Demand Curve!
Demand shifts right
Business ↑ sales of Bonds => borrowing more money for capital investment (I)!

6. Theory of Crowding Out
↑ Government deficits shifts supply of loanable funds left
National Savings falls
public savings is more negative
This leads to rising long-term interest rates
Higher interest rates (r2) => a fall in business investment (I↓)
Gov’t crowds out private borrowers (firms) who borrow less $ for capital goods (I)
End Result: society has less capital investment. => in the long run, PPF curve will not shift to the right as far (less innovation, lower increase in full potential) r2 Q2

7. Loanable Funds Handout