ScienceEconomicsEcon Chapter 7 example #1367
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Econ Chapter 7

Paloma Kelly avatar Paloma Kelly
25 July 2022
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The loanable funds market is
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The aggregate of all the individual financial market
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The real interest rate is opportunity cost of loanable funds because
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The real interest paid on borrowed funds is opportunity cost of borrowing and the real interest rate forgone is the opportunity cost of not saving or not lending those funds
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Firms investment decisions
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- firms invest in capital only if they expect to earn a profit - fewer projects are profitable at a higher real interest rate that at a low real interest rate - the higher the real interest rate the smaller is the quantity of loanable funds demanded other things remaining the same
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The demand for loanable funds is determined by
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The real interest rate and expected profit
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The demand for loanable funds changes when
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expected profit changes
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Demand for loanable funds increases and the supply of loanable funds increases
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The equilibrium real interest rate rises and the equilibrium quantity of loanable funds increases, decreases, or remains the same
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Decrease in expected profit
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Decreases the demand for loanable funds and brings a leftward shift of the demand for loanable funds curve
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An increase in current income taxes
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Decreases the supply of global fund say because it decreases disposable income which decreases saving
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A government budget surplus ________ the supply loanable funds. The real interest rate _____, ______, decreases and ______ increases
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Increases; falls; private savings; investment
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A government budget deficit ________ the demand for loanable funds. The real interest rate ________, ________ increases, and _________ decreases.
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Increases; rises; private saving; investment
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Loanable funds flow among countries because
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Funds flow into the country with the highest real interest rate and out of the country in which the real interest rate is lowest
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If a country has a shortage of loanable funds at the world real interest rate
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world suppliers of loanable funds move funds to this country