ECON 2H03 Lecture Notes - Lecture 12: List Of Isuzu Engines, Loanable Funds, Real Interest Rate

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Simple supply demand model of financial system . Comes from investment- firms borrow to spend on plant/equip. consumers borrow to buy houses. Depends negatively on r, - price of loanable funds. Savings households make deposits to banks, bonds/assets - these fund become available to firms purchase government may also contribute to savings if it has surplus tax revenue. The role of r r adjusts to equilibrate the market for loanable funds and for goods if market for lf in equilibrium, Equilibrium in one market implies the other is also in equilibrium. Government changes spending or taxes, affects economy"s output of goods/services and alters nation saving, investment and interest rate. Increase in gov purchases must be met with eqal decrease in investment as t and c remain unchanged -- y= c+i+g (i decrease, g increase) Gov finances additional spending by borrowing, reducing public savings. Private saving unchanged, government borrowing reduces national saving s=y-c-g (s falls, g increases)

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