MAcro CHAPTER 4.7:
The Loanable Funds Market
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CHAPTER SUMMARY
The loanable funds market is where borrowers (demand) and lenders (supply) meet to lend funds. The equilibrium in this market determines the quantity of funds loaned/borrowed, and the real interest rate.
Borrowers are willing to borrow more as the real interest rate falls, so the demand for loanable funds is downward-sloping. Lenders are willing to lend more as the real interest rate rises, so the supply of loanable funds is upward-sloping. As a result, the market looks like this:
Changes in demand and supply of loanable funds work exactly like changes in supply and demand of goods, or changes in AD and SRAS.
Demand for loanable funds can come from:
Foreigners who want to purchase goods in our currency
Consumers & firms who want to borrow money
Governments that want to spend more money than they have
Supply of loanable funds can come from:
Foreign investors in our economy
Consumers & firms with extra, unneeded money
The Federal Reserve
This graph really focuses on real interest rates in the long-term, in response to changes in the supply of and demand for money. This is important to note when comparing it to the money market in chapter 4.5. Demand and supply of money moves more slowly than monetary policy of the Fed, which can change instantly, because people and businesses need time to respond to changes in the market.
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