AP Economics
Mr. Bernstein
Module 29:
The Market for Loanable Funds
February 2016
AP Economics
Mr. Bernstein
The Market for Loanable Funds
• Objectives - Understand each of the following:
• How the loanable funds market matches savers and
investors
• The determinants of supply and demand in the
loanable funds market
• How the two models of interest rates can be reconciled
2
AP Economics
Mr. Bernstein
Equilibrium in the Loanable Funds Market
• D is downward sloping
• as rates fall, projects
become more profitable
• S is upward sloping
• Must earn higher rates
to forego consumption
• Based on indiv. decisions,
unlike vertical MS line
• Y axis: Real Interest Rate
3
AP Economics
Mr. Bernstein
Shifts in Demand, Supply of Loanable Funds
• Shifts in Demand
• D in perceived business opportunities
• D in government borrowing (“Crowding Out”)
• Shifts in Supply
• D in private saving behavior
• D in capital inflows
• All shifts in Demand or Supply D Interest Rates…but…
• Real interest rates are not affected by changes in
expected inflation (only nominal rates are
affected…”The Fisher Effect”)
4
AP Economics
Mr. Bernstein
Inflation and Interest Rates
• D in Expected
Inflation causes
upward shift in D
and in S
• New equilibrium
at higher nominal
rate but same
expected real rate
5
AP Economics
Mr. Bernstein
Reconciling LPF with Loanable Funds Model
6
AP Economics
Mr. Bernstein
Reconciling LPF with Loanable Funds Model
7