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Market for Loanable Funds
#1
#2
S
S2
1
r2
r2
r1
r1
S1
D2
D1
D1
I1
S1
I2
S2
I2 I1
S2 S1
Add a Supply Curve & show the equilibrium
Draw an increase in Demand (a shift in the
curve, not a movement along the curve) & show
the new equilibrium
Add a Demand Curve & show the equilibrium
Draw an decrease in Supply (a shift in the curve,
not a movement along the curve) & show the
new equilibrium
As a result of the increase in demand, theory
predicts the interest rate should go _up__
Overall, investment will go __up__
This will make the economy grow more:
(quickly / slowly)
As a result of the decrease in supply, theory
predicts the interest rate should go __up__
Overall, investment will go __down__
This will make the economy grow more:
(quickly / slowly)
The reasons demand would increase:



The reason supply would decrease:
 Increased consumer confidence
New technology
 Decrease consumer patience
Improved investor sentiments (optimism)
 Decrease disposable income, maybe
Improved government policy towards
 Worsened government policy towards
investment (larger ITC’s)
savings
 Decrease in government budget surplus
(or increase in government budget
deficit)
#3 Reasons the real interest rate would increase:
Potential Funds Shortage from a(n):


Increase in Loanable Funds Demand
o New technology
o Improved investor sentiments (optimism)
o Improved government policy towards investment (larger ITC’s)
Decrease in Loanable Funds Supply
o Increased consumer confidence
o Decrease consumer patience
o Decrease disposable income, maybe
o Worsened government policy towards savings
o Decrease in government budget surplus (or increase in gov. budget deficit)
#4
S1
#5
S1
S2
r1
r1
r2
r2
D2
I2
S2
D1
I1
S1
D1
I2
S2
Fully label above graph.
I1
S1
Fully label above graph.
Add a Supply Curve & show the equilibrium
Draw an decrease in Demand (a shift in the
curve, not a movement along the curve) & show
the new equilibrium
Add a Demand Curve & show the equilibrium
Draw an increase in Supply (a shift in the curve,
not a movement along the curve) & show the
new equilibrium
As a result of the decrease in demand, theory
predicts the interest rate should go _down_
Overall, investment will go __down_
This will make the economy grow more:
(quickly / slowly)
As a result of the increase in supply, theory
predicts the interest rate should go _down__
Overall, investment will go __up___
This will make the economy grow more:
(quickly / slowly)
The reasons demand would decrease:
The reason supply would increase:
 Decreased consumer confidence
 Increase consumer patience
 Increase disposable income, maybe
 Improved government policy towards
savings
 Increase in government budget surplus
(or decrease in government budget
deficit)


Worsened investor sentiments
(pessimism)
Worsened government policy towards
investment (smaller ITC’s)
#6 Reasons the real interest rate would decrease:
Potential Funds Surplus from a(n):


Decrease in Loanable Funds Demand
o Worsened investor sentiments (pessimism)
o Worsened government policy towards investment (smaller ITC’s)
Increase in Loanable Funds Supply
o Decreased consumer confidence
o Increase consumer patience
o Increase disposable income, maybe
o Improved government policy towards savings
o Increase in government budget surplus (or decrease in gov. budget deficit)
NOTE: This page is just the opposite of the previous page (except technology can’t be reversed)