Macroeconomics Chapter 19 Notes
The Market For Loanable Funds
• An identity from the preceding chapter:
S = I + NCO
(saving) = (domestic income) + (net capital outflow)
• Supply of loanable funds = saving
• A dollar of saving can be used to finance
➢ The purchase of domestic capital
➢ The purchase of a foreign asset
• So, demand for loanable funds = I + NCO
➢ S depends positively on the real interest rate, r.
➢ I depends negatively on r.
• What about NCO?
How NCO Depends on the Real Interest Rate
• The real interest rate, r, is the real return on domestic assets.
• A fall in r makes domestic assets less attractive relative to foreign assets.
➢ People in the US purchase more foreign assets
➢ People abroad purchase fewer US assets
➢ NCO rises
The Loanable Funds Market Diagram
• r adjusts to balance supply and demand in the loanable funds market
• Both I and NCO depend negatively on r, so the demand curve is downward-
The Market for Foreign-Currency Exchange
• Another identity from the previous chapter:
NCO = NX
(net capital outflow) = (net exports)
• In the market for foreign-currency exchange:
➢ NX is the demand for dollars: Foreigners need dollars to buy US net exports.
➢ NCO is the supply of dollars: US residents sell d