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AP Macro > 5.08: Market for Loanable Funds > Flashcards

5.08: Market for Loanable Funds Flashcards

1
Q

Why do businesses borrow money? Why is this good?

A

To have money to expand their capital

  • ALlows for increases in GDP, short-run positive impact, long-run greater productive capacity
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2
Q

What is bought and sold in the market for loanable funds?

A

Loans

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3
Q

Who are demanders on the Market for Loanable Funds?

A

Businesses, consumers, and government

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4
Q

Who are the suppliers? Where do they get their funds?

A

Banks; savings (money that stays in reserves) are where they get their funds

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5
Q

What is the price of a loan?

A

Interest

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6
Q

How will borrowers react to higher interest rates?

A

Sad! (demand dec)

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7
Q

How do lenders react to higher interest rates?

A

Glad! (demand inc)

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8
Q

What causes the gov to demand loans?

A

Budget deficits

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9
Q

Why is the market for loanable funds so important?

A

Increases capital purchases

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10
Q

Why is the demand curve for loanable funds downwards sloping?

A

As the cost of borrowing decreases, there will be a higher quantity demanded of loans

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11
Q

Why is the supply curve for loanable funds upward sloping?

A

As the cost of borrowing increases, there will be a higher quantity of supplied loans

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12
Q

What is the source of supply in the Market for Loanable funds?

A

Savings! (money in bank)

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13
Q

Shifters of supply of the Market for Loanable Funds

A
  1. Changes in Private Savings
  2. Changes in foreign financial capital inflows (foreign savings brought to U.S.)
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14
Q

Shifters of Demand of the market for Loanable Funds

A
  1. Changes in business or consumer outlook
  2. Changes in government borrowing
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15
Q

Money market shows the price and quantity of…

A

M1, the most liquid form of cash

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16
Q

The price, or interest rate, of the Money Market represents the rate on

A

short term loans (6 months or less)

17
Q

Banks or business might need short term loans for…

A

immediate cash needs these for immediate cash needs (to meet reserve requirements, etc)

18
Q

The market for loanable funds shows the price and quantity of…

A

long-term loans

19
Q

The price, or interest rate of the Market for Loanable funds, is based on

A

The short-term rate and risk premium for extra duration of a loan

20
Q

Businesses primarily use the market for loanable funds to fund

A

long-term investment in capital stock

21
Q

Businesses will only borrow loans if

A

the return on their project is greater than the interest

AP Macro (5 decks)

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