CLAS 110 Lecture Notes - Lecture 4: Loanable Funds, Demand Curve
Week 4
●Market for loanable funds: includes participants/actions that are involved in
borrowing/lending money
○ Participants include commercial banks, stock exchange, investment banks, etc.
○ Loanable funds include stocks, bonds, loans, etc.
○ The loanable funds market is where interest rates are determined
■ Loan demanders: borrowers
● Firms (and government) borrow in order to invest
● Businesses rarely have enough money to start or expand their
business; they have to borrow
● They won’t borrow money unless they expect the investment to
make them get back their money
● Higher interest rate → harder to pay the loan → businesses
borrow less → demand curve for loans is downward sloping
■ Loan suppliers: savers
● Households (or foreigners) who buy stocks/bonds, lend money
even if they don’t intend to.
● When you save money in a bank account, the bank lends (part of)
money to businesses
● If households don’t save enough there is not enough to be lent out
● Higher interest rate → households save (and therefore lend) more
→ supply curve is upward sloping
■ Loan price: interest rate
■ Loan quantity: savings or investments in the economy
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Document Summary
Market for loanable funds: includes participants/actions that are involved in borrowing/lending money. Participants include commercial banks, stock exchange, investment banks, etc. Loanable funds include stocks, bonds, loans, etc. The loanable funds market is where interest rates are determined. Firms (and government) borrow in order to invest. Businesses rarely have enough money to start or expand their business; they have to borrow. They won"t borrow money unless they expect the investment to make them get back their money. Higher interest rate harder to pay the loan businesses borrow less demand curve for loans is downward sloping. Households (or foreigners) who buy stocks/bonds, lend money even if they don"t intend to. When you save money in a bank account, the bank lends (part of) money to businesses. If households don"t save enough there is not enough to be lent out. Higher interest rate households save (and therefore lend) more.
