AP Macroeconomics AMSCO Guided Notes
4.7: The Loanable Funds Market
AP Macroeconomics Guided Notes
AMSCO 4.7 - The Loanable Funds Market
Essential Questions
- How do the interactions of borrowers and savers determine the equilibrium interest rate of loanable funds?
I. How the Loanable Funds Market Works
A. Supply and Demand
1. What is the loanable funds market and what are the sources of the supply of loanable funds?
2. How do interest rates affect the quantity of loanable funds supplied and demanded?
3. What factors motivate individuals and businesses to demand loanable funds?
B. Interest Rates
1. What is the difference between the nominal interest rate and the real interest rate?
II. Graphing the Market for Loanable Funds
1. Why does the supply curve for loanable funds slope upward and the demand curve slope downward?
2. What happens to interest rates when the quantity supplied of loanable funds falls below the quantity demanded?
3. How do interest rates adjust when the quantity supplied of loanable funds exceeds the quantity demanded?
III. Determinants of Supply and Demand in the Loanable Funds Market
1. What is the national savings rate and what does it measure about a nation's economy?
2. How does the relationship between national saving and investment differ in a closed economy versus an open economy?
A. Incentives to Save and to Invest
1. How do tax laws on interest income affect the incentive to save in the United States?
2. How do investment tax credits affect the demand for loanable funds and interest rates?
B. Government Budget Deficits or Surpluses
1. What is crowding out and how does a federal budget deficit cause it to occur?
2. How does a budget surplus affect the supply of loanable funds and investment?
Key Terms
loanable funds market
national saving
investment spending
equilibrium interest rate