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

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

3. Figure 2 An Increase in the Supply of Loanable Funds Loanable funds (in billions of euros) 0 Interest rate Supply,S1S1 S2S2 2.... which reduces the equilibrium interest rate... 3.... 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

4. 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... 2.... which raises the equilibrium interest rate... 3.... and raises the equilibrium quantity of loanable funds. Supply Demand,D1D1 D2D2 5% € 500 6% € 600 Copyright © 2011 Cengage Learning

5. Figure 4 The Effect of a Government Budget Deficit Loanable funds (in billions of euros) 0 Interest rate 3.... and reduces the equilibrium quantity of loanable funds. S2S2 2.... 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