Loanable Funds

Loanable Funds Market
-The market where savers and borrowers exchange funds (Qlf) at the real rate of interest (r%)
-The demands for loanable funds, or borrowing comes from households, firms, government, and foreign sectors
-The demand for loanable funds is in fact the supply of bonds
-The supply of loanable funds or savings come from households, firms, government, and foreign sectors
-The supply of loanable funds is also the demand for bonds

Changes in the Demand for Loanable Funds
-Remember that demand for loanable funds=borrowing (i.e. supplying bonds)
-More borrowing=more demand for loanable funds (->)
-Less borrowing=less demand for loanable funds (<-)
Ex.
-Government deficit spending=More borrowing=More demand for loanable funds causing the real interest rate to increase 
-Less investment demand=Less borrowing=Less demand for loanable funds causing the real interest rates to drop

Changes in Supply of Loanable Funds
-Remember that supply of LF=Saving (i.e. demand for bonds)
-More saving=More supply of loanable funds (->)
-Less saving=Less supply of loanable funds (<-)
Ex. 
-Government budget surplus=More saving=More supply of loanable funds
(If supply of loanable funds shift right, real interest rate decreases
-Decrease in consumers' MPS=Less saving=Less supply of loanable funds
(If supply of loanable funds shift left, real interest rate increases)