5.08: Market for Loanable Funds Flashcards
Why do businesses borrow money? Why is this good?
To have money to expand their capital
- ALlows for increases in GDP, short-run positive impact, long-run greater productive capacity
What is bought and sold in the market for loanable funds?
Loans
Who are demanders on the Market for Loanable Funds?
Businesses, consumers, and government
Who are the suppliers? Where do they get their funds?
Banks; savings (money that stays in reserves) are where they get their funds
What is the price of a loan?
Interest
How will borrowers react to higher interest rates?
Sad! (demand dec)
How do lenders react to higher interest rates?
Glad! (demand inc)
What causes the gov to demand loans?
Budget deficits
Why is the market for loanable funds so important?
Increases capital purchases
Why is the demand curve for loanable funds downwards sloping?
As the cost of borrowing decreases, there will be a higher quantity demanded of loans
Why is the supply curve for loanable funds upward sloping?
As the cost of borrowing increases, there will be a higher quantity of supplied loans
What is the source of supply in the Market for Loanable funds?
Savings! (money in bank)
Shifters of supply of the Market for Loanable Funds
- Changes in Private Savings
- Changes in foreign financial capital inflows (foreign savings brought to U.S.)
Shifters of Demand of the market for Loanable Funds
- Changes in business or consumer outlook
- Changes in government borrowing
Money market shows the price and quantity of…
M1, the most liquid form of cash
The price, or interest rate, of the Money Market represents the rate on
short term loans (6 months or less)
Banks or business might need short term loans for…
immediate cash needs these for immediate cash needs (to meet reserve requirements, etc)
The market for loanable funds shows the price and quantity of…
long-term loans
The price, or interest rate of the Market for Loanable funds, is based on
The short-term rate and risk premium for extra duration of a loan
Businesses primarily use the market for loanable funds to fund
long-term investment in capital stock
Businesses will only borrow loans if
the return on their project is greater than the interest