Loanable Fund Market

• the market where saver and borrowers exchange funds (Qlf) at the real rate of interest (r%)

• the demand for loanable funds, or borrowing comes from households, firms, govt, and the foreign sector. The damns for loanable funds is in fact the supply of bonds

• the supply of loanable funds, or saving comes from households, firms, govt, and the foreign sector. The supply of loanable funds is also the demand for bonds

Changes in the demand for loanable funds

• remember that demand for loanable funds = borrowing (supply bonds)

• more borrowing = more demand for loanable funds ->

• less borrowing = less demand for loanable funds (<-)

• example 

     - government deficit spending = more borrowing = more demand for loanable funds 

    -Dlf -> r%^

    -less investment demand = less borrowing = less demand for loanable funds 

Changes in the supply of loanable funds

• remember that supply of loanable funds = savings ( demand for bonds)

• more saving = more supply of loanable funds ->

• less saving = less supply of loanable funds <-

• examples 

     - government budget surplus = more saving = more supply of loanable funds

     - Slf -> r%^

     -  decrease in consumers' MPS = less Savings = less supply of loanable funds

Final thoughts of loanable funds 

• when the government does fiscal policy it will affect the loanable funds 

• changes in the real interest rate (r%) will affect gross private investment