All Flashcards
How does increased government borrowing impact the real interest rate?
Increased government borrowing increases the demand for loanable funds, leading to a higher real interest rate.
How does increased savings affect the supply of loanable funds?
Increased savings increases the supply of loanable funds, leading to a lower real interest rate.
How do expectations of future economic growth affect the demand for loanable funds?
Positive economic outlook increases the demand for loanable funds as businesses invest and expand.
How do expectations of high inflation affect the supply of loanable funds?
High inflation expectations decrease the supply of loanable funds as lenders seek higher returns to compensate for inflation.
How does a decrease in the discount rate affect the supply of loanable funds?
A decrease in the discount rate increases the supply of loanable funds as banks borrow more from the central bank.
How does increased foreign investment in a country affect its loanable funds market?
Increased foreign investment increases the supply of loanable funds, lowering the real interest rate.
How does a decrease in consumer confidence impact the demand for loanable funds?
Decreased consumer confidence decreases the demand for loanable funds as households postpone large purchases.
How does a government surplus affect the loanable funds market?
A government surplus decreases the demand for loanable funds, potentially lowering real interest rates.
How does increased lending activity impact the demand for loanable funds?
Increased lending activity increases the demand for loanable funds, potentially raising real interest rates.
If a country experiences capital flight, what happens to its supply of loanable funds?
Capital flight decreases the supply of loanable funds, leading to higher real interest rates.
What is the Loanable Funds Market?
The market where borrowers (demand) and savers (supply) interact to determine the real interest rate.
Define Real Interest Rate.
The price that balances the loanable funds market; nominal interest rate adjusted for inflation.
What is the equilibrium in the loanable funds market?
The point where the quantity of loanable funds demanded equals the quantity supplied.
Define Demand for Loanable Funds.
The total amount of borrowing that firms, households, and the government are willing to undertake at a given interest rate.
Define Supply of Loanable Funds.
The total amount of savings that individuals, firms, and the government are willing to lend at a given interest rate.
What is Deficit Spending?
When a government's expenditures exceed its revenues, leading to increased borrowing.
Define Discount Rate.
The interest rate at which commercial banks can borrow money directly from the central bank.
What is the Savings Rate?
The proportion of disposable income that households save rather than spend.
Define Foreign Purchases of Domestic Assets.
When foreign entities invest in a country's assets, increasing the supply of loanable funds.
What is Foreign Demand for Domestic Currency?
The desire by foreign entities to hold a country's currency, impacting the demand for loanable funds.
What is the difference between the nominal interest rate and the real interest rate?
Nominal interest rate is the stated rate; real interest rate is adjusted for inflation.
Compare the effects of increased savings versus increased government borrowing on the real interest rate.
Increased savings decreases the real interest rate; increased government borrowing increases it.
What is the difference between factors that shift the demand curve versus the supply curve?
Demand shifters (BIG DEE) affect borrowing; supply shifters (FELS) affect lending/saving.
Compare the impact of positive vs. negative economic expectations on the loanable funds market.
Positive expectations increase demand; negative expectations increase supply (as people save more).
What is the difference between the loanable funds market and the money market?
The loanable funds market deals with long-term interest rates, while the money market deals with short-term interest rates.
Compare the effects of a government surplus versus a government deficit on the demand for loanable funds.
A government surplus decreases the demand, while a government deficit increases the demand.
What is the difference between the impact of domestic savings and foreign investment on the supply of loanable funds?
Both increase the supply, but foreign investment can be more volatile and subject to capital flight.
Compare the effects of an increase in the discount rate versus an increase in the reserve requirement on the supply of loanable funds.
An increase in the discount rate decreases the supply, while an increase in the reserve requirement also decreases the supply.
What is the difference between the effects of inflation expectations on borrowers versus lenders?
Borrowers benefit from inflation, as they repay debts with cheaper money; lenders are harmed, as the real value of their returns decreases.
Compare the effects of expansionary monetary policy versus expansionary fiscal policy on the loanable funds market.
Expansionary monetary policy increases the supply of loanable funds, while expansionary fiscal policy increases the demand for loanable funds.