ECON 101 Lecture Notes - Lecture 16: Loanable Funds

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20 Oct 2016
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A supply-demand model of the financial system. How the financial system coordinates saving and investment. How govt policies and other factors affect saving, investment, the interest rate. All savers deposit their saving in this market. All borrowers take out loans from this market. There is one interest rate, which is both the return to saving and the cost of borrowing. The supply of loanable funds comes from saving: Households with extra income can loan it out and earn interest. If positive, adds to national saving and the supply of loanable funds. If negative, it reduces national saving and the supply of loanable funds. An increase in interest rate makes saving more attractive, which increases the quantity of loanable funds. The demand for loanable funds comes from investment. Firms borrow the funds they need to pay for new equipment, factories, etc. Households borrow the funds they need to purchase new houses.

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