Assignment 7
New Concept The Loanable Funds Market
This is on pages 91-97 in the $5 notes
This is on pages 570-579 in the Textbook
This concept will give some of you difficulty, just do the best you can.
The worksheet can be difficult as well, do your best to work through it.
The Loanable Funds market uses Real Interest rates. The idea is a simple supply and demand graph of loanable funds. Loanable funds are made up of what we are willing to loan (supply) and what people and businesses are looking to borrow(the demand) for loanable funds.
Beyond the basics of supply and demand the concept to add here is that if the government undertakes fiscal policy which causes a deficit they will need to borrow money from this loanable funds market. The video that I will post from AC DC economics has government borrowing on the Demand line, thus shifting the demand for loanable funds. I would encourage you to put government borrowing on the supply line. AP will accept either one as either are acceptable, however there is a benefit that I will teach you to putting government borrowing on the supply line. Just think of it this way for now, if you increase the demand for loanable funds (because the government has a deficit that they have to finance) this will make the interest rate increase. If however you decrease the supply of loanable funds because the government borrows before anyone else (thus decreasing the supply of loanable funds) you will still end up with a higher interest rate, but sometimes they ask an additional question on the AP exam and if they do then you will already have the answer to the question if you have moved the supply line of loanable funds. Just trust me on this for now.
When the government runs a deficit and borrows money from the loanable funds market (either by increasing demand or decreasing supply) we call it "crowding out." The Government is "crowding out" others from getting loans as the quantity of loanable funds is limited. In addition remember that when the interest rate increases this makes interest sensitive consumption and investment decrease which will also have an effect on Aggregate Demand. Additionally, if investment decreases we could see a decrease in aggregate supply and if it persists for a long period of time so that Interest rates stay high and discourage investment for a longer period of time we could even see a shift in the Long Run Aggregate Supply Curve.
First a link to the video from AC DC Economics
www.youtube.com/watch?v=hucfTz4sPfU
Next a link to the worksheet
documentcloud.adobe.com/link/track?uri=urn%3Aaaid%3Ascds%3AUS%3Ab41d6459-b9fd-4185-b5f1-97570bfce28d
This is on pages 91-97 in the $5 notes
This is on pages 570-579 in the Textbook
This concept will give some of you difficulty, just do the best you can.
The worksheet can be difficult as well, do your best to work through it.
The Loanable Funds market uses Real Interest rates. The idea is a simple supply and demand graph of loanable funds. Loanable funds are made up of what we are willing to loan (supply) and what people and businesses are looking to borrow(the demand) for loanable funds.
Beyond the basics of supply and demand the concept to add here is that if the government undertakes fiscal policy which causes a deficit they will need to borrow money from this loanable funds market. The video that I will post from AC DC economics has government borrowing on the Demand line, thus shifting the demand for loanable funds. I would encourage you to put government borrowing on the supply line. AP will accept either one as either are acceptable, however there is a benefit that I will teach you to putting government borrowing on the supply line. Just think of it this way for now, if you increase the demand for loanable funds (because the government has a deficit that they have to finance) this will make the interest rate increase. If however you decrease the supply of loanable funds because the government borrows before anyone else (thus decreasing the supply of loanable funds) you will still end up with a higher interest rate, but sometimes they ask an additional question on the AP exam and if they do then you will already have the answer to the question if you have moved the supply line of loanable funds. Just trust me on this for now.
When the government runs a deficit and borrows money from the loanable funds market (either by increasing demand or decreasing supply) we call it "crowding out." The Government is "crowding out" others from getting loans as the quantity of loanable funds is limited. In addition remember that when the interest rate increases this makes interest sensitive consumption and investment decrease which will also have an effect on Aggregate Demand. Additionally, if investment decreases we could see a decrease in aggregate supply and if it persists for a long period of time so that Interest rates stay high and discourage investment for a longer period of time we could even see a shift in the Long Run Aggregate Supply Curve.
First a link to the video from AC DC Economics
www.youtube.com/watch?v=hucfTz4sPfU
Next a link to the worksheet
documentcloud.adobe.com/link/track?uri=urn%3Aaaid%3Ascds%3AUS%3Ab41d6459-b9fd-4185-b5f1-97570bfce28d