All Flashcards
What does a rightward shift in the demand curve for loanable funds indicate?
An increase in the demand for loanable funds, leading to a higher real interest rate.
What does a leftward shift in the supply curve for loanable funds indicate?
A decrease in the supply of loanable funds, leading to a higher real interest rate.
On a loanable funds market graph, what is on the x-axis and y-axis?
X-axis: Quantity of Loanable Funds; Y-axis: Real Interest Rate.
How does an increase in savings appear on the loanable funds market graph?
As a rightward shift of the supply curve, leading to a lower equilibrium interest rate.
How does increased government borrowing appear on the loanable funds market graph?
As a rightward shift of the demand curve, leading to a higher equilibrium interest rate.
What happens to the equilibrium point when both supply and demand increase?
The quantity of loanable funds increases, but the impact on the real interest rate is indeterminate without knowing the magnitude of the shifts.
If the demand curve shifts left, what happens to the equilibrium interest rate?
The equilibrium interest rate decreases.
If the supply curve shifts right, what happens to the equilibrium quantity of loanable funds?
The equilibrium quantity of loanable funds increases.
On the graph, what does the intersection of the supply and demand curves represent?
The equilibrium real interest rate and the equilibrium quantity of loanable funds.
How would you graphically represent the effect of capital flight on the loanable funds market?
A leftward shift of the supply curve.
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.