Econ Chapter 9: Loanable Funds Market – Flashcards

market where savers supply funds for loans to borrowers

where firms obtain financing for their operations

household saving across the economy

1. Stock exchanges 2. Investment banks 3. Mutual fund firms 4. Commercial banks

1. Households** (private individuals and families) 2. Foreign entities (foreign gov't, firms, and citizens that save in the U.S.)

1. Firms** 2. Governments

To INVEST - firms looking to produce output in the future borrow to cover expenses of today

future GDP would dry up

producing output, selling it, generating GDP, use to repay loans

...requires a dollar saved"

GDP requires investment, investment requires borrowing, borrowing requires saving

price of loanable funds, quoted as a percentage of the original loan amount PRICES!!

to savers: interest rate is return you get for supplying funds- a reward

to borrowers: interest rate is the cost of borrowing

1. Increase in IR increases incentive to save and leads to increased quantity of savings 2. Decrease in IR decreases incentive to save and leads to decreased quantity of savings

they expect the return on investment to be higher than the cost of the loan

1. Decreases in IR increases incentive to borrow and leads to quantity demanded of loans increasing 2. Increases in IR decrease incentive to borrow and lead to quantity demanded of loans decreasing

interest rate before it is corrected or inflation

interest rate that is corrected for inflation - describes how the real purchasing power of the funds changes over the course of a loan

Real interest rate= Nominal Interest rate - Inflation rate

1. Nominal IR are the stated interest rates that you see in finical transactions 2. Low and steady inflation results little difference between real and nominal IR's anyways

1. Income and Wealth 2. Time Preferences 3. Consumption Smoothing

increases in income generally produce increases in savings - as nations gain wealth, they save more - increases in foreign savings help the US loanable funds market - foreign funds important for US loanable funds market

people prefer to receive funds/goods/services sooner rather than later - weak time preferences mean that person is willing to save more Strong vs. Weak time preferences 1. Strong: least patient, want money NOW 2. Weak: most patient, will wait **people with strong time preferences save less than people with weak time preferences Ex. Strong time preferences person may choose not to attend college because the rewards, although greater, take too long to come

when people borrow and save in order to smooth consumption over their lifetime - income fluctuates over life, (low in beginning, highest at middle age, low at end) - people borrow when income is low and save when income is high, the dissave when income is low at end of life all to maintain around the same standard of living (consumption) - Borrowing-> Saving-> Dissaving Young: borrow Midlife: repay loans and save (your income is above your consumption line) Old age: spend savings Macroeconomic issues iwht consumption smoothing: - works fine if equal number of young, midlife, and old people - if many midlife people are aging at once, like now, overall savings in LFM fall

when people draw funds from their previously accumulated savings

personal saving as a portion of disposable income - if time preferences are climbing, savings rates go down - gains from real estate and stocks and bonds are not counted as savings

1. Productivity of Capital 2. Investor Confidence

level of demands for loans depends on productivity of capital - how much money does it take to buy something? because this alters whether a loan is worth the cost Ex. Over past several years, the productivity and value of the internet has risen, making it a more productive investment and making it more worth taking a loan out for

measure of what firms expect of future economic activity - if a firm believes future sales will be high, they will borrow more today to prepare of the higher sales - decline in overall economy leads firms to expect lower sales in future and leads to decrease in demand for loans

occurs at the interest rate where plans of savers match plans of borrowers

"Every dollar borrowed requires a dollar saved"

If foreign income grows it could cancel out the decrease in savings supply that has resulted from the aging of current midlifers