1. The Loanable Funds Market
AP Macroeconomics
The Loanable Funds Market

2. Loanable Funds Market
The market where savers and borrowers exchange funds (QLF) at the real rate of interest (r%). The loanable funds market determines long-term interest rates
The demand for loanable funds, or borrowing comes from households, firms, government and the foreign sector.
The supply of loanable funds, or savings comes from households, firms, government and the foreign sector.

3. Loanable Funds Market in Equilibrium
SLF r
DLF
QLF q

4. Changes in the Demand for Loanable Funds
Remember that demand for loanable funds = borrowing (i.e. supplying bonds)
More borrowing = more demand for loanable funds ()
Less borrowing = less demand for loanable funds ()
Examples
Government deficit spending = more borrowing
= more demand for loanable funds
.: DLF  .: r%↑
Less investment demand = less borrowing
= less demand for loanable funds
.: DLF .: r%↓

5. Increase in the Demand for Loanable Funds
SLF r1 r
DLF 1
DLF
QLF q q1
DLF  .: r% ↑ & QLF ↑

6. Decrease in the Demand for Loanable Funds
SLF r r1
DLF
DLF 1
QLF q1 q
DLF  .: r% ↓ & QLF ↓

7. Changes in the Supply of Loanable Funds
Remember that supply of loanable funds = saving (i.e. 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 saving
= less supply of loanable funds
.: SLF .: r%↑

8. Increase in the Supply of Loanable Funds
SLF
SLF 1 r r1
DLF
QLF q q1
SLF  .: r% ↓ & QLF ↑

9. Decrease in the Supply of
Loanable Funds
SLF 1 r%
SLF r1 r
DLF
QLF q1 q
SLF  .: r% ↑ & QLF ↓

10. Final thoughts on Loanable Funds
Loanable funds market determines the real interest rate (r%).
Loanable funds market relates saving and borrowing and is a long-term market.
Changes in saving and borrowing create changes in loanable funds and therefore the r% changes.
When government does fiscal policy it will affect the loanable funds market.
Changes in the real interest rate (r%) will affect Gross Private Investment

11. Effect of Expansionary Fiscal Policy on Loanable Funds & Investment
SLF r% r% r1 r
DLF 1 ID
DLF IG q q1
QLF I1 I
G↑ and/or T↓ .: Government deficit spends .: DLF  .: r%↑ .: IG↓
(Crowding-Out Effect)