《《chap 5 saving_investment》.ppt

THE MARKET FOR LOANABLE FUNDS The supply of loanable funds comes from people who have extra income they want to save and lend out. The demand for loanable funds comes from households and firms that wish to borrow to make investments. occur Buying a bond from a firm; Make a deposit in a bank Saving Investment Supply and Demand for Loanable Funds The price of the loan is the interest rate. The interest rate represents the amount that borrowers pay for loans and the amount that lenders receive on their saving. The interest rate in the market for loanable funds is the real interest rate. How is the real interest rate determined in the market for loanable funds? Loanable Funds Interest Rate The supply of loanable funds Supply or saving Because a high interest rate makes saving more attractive, the quantity of loanable funds supplied rises as the interest rate rises. Loanable Funds Interest Rate The demand for loanable funds Demand or investment Because a high interest rate makes borrowing more expensive, the quantity of loanable funds demanded falls as the interest rate rises. Supply and Demand for Loanable Funds The equilibrium of the supply and demand for loanable funds determines the price of loan. The Market for Loanable Funds Loanable Funds (in billions of dollars) 0 Interest Rate Saving Investment 5% $1,200 Copyright?2004 South-Western 7% Quantity of loanble funs supplied Quantity of loanble funs demanded 4% What’s the determinants? What’s the determinants? Taxes and saving Taxes and investment Government budget deficits Government Policies That Affect Saving and Investment Government Policies That Affect Saving and Investment Policy 1: Saving Incentives Taxes on interest income substantially reduce the future payoff from current saving and, as a result, reduce the incentive to save. Policy 1: Saving Incentives A tax decrease increases the incentive for households to save at any given interest rate. The supply of loanable funds curve shifts to the