Macroeconomics ECON202
Guided notes
Chapter 9 Savings, interest rates, and the market for loanable funds
Big Questions to study
A. What is the loanable funds market?
• The loanable funds markets connects savers with borrowers
• Savers are suppliers of loanable funds, and they earn interest as a reward for saving
• Borrowers are the buyers of loanable funds, and they pay interest as the cost of borrowing
B. What factors shift the supply of loanable funds?
• Changes in income and wealth shift the supply of loanable funds
• Changes in time preferences also affect the supply of loanable funds
• Consumption smoothing is another factor that shifts the loanable funds supply
C. What factors shift the demand for loanable funds?
• Capital productivity affects the demand for loanable funds
• Investor confidence also affects the demand for loanable funds
D. How do we apply the loanable funds market model?
• We can use the loanable funds market model to examine real-world changes in both supply and
demand for loanable funds
• The loanable funds model also clarifies the important conclusion that every dollar borrowed requires a
dollar saved
Flow of chapter 9
1
, 1. Loanable funds market: market for loans
2. Supply of loans (savings)
- Move along the curve vs shift of the curve
3. Demand for loans (borrowings)
- Move along the curve vs shift of the curve
4. Put supply and demand together
- Market equilibrium
Motivating example:
How much are we saving?
A. What is the loanable funds market?
Loanable fund market:
- channel the good from suppliers to demanders
- Suppliers: savers (households) supply savings to banks.
- Demanders: borrowers, such as firms and governments demand loans, banks loan out the money
to borrowers.
- Good: loans
Middle person in the loanable fund market: a bank
With loanable funds ! Firms can borrow and invest.
With investments ! Firms can produce
When firms produce ! GDP of the economy increases.
Savings → borrowing → investment → GDP growth
Loanable fund markets make the above chain possible.
Loanable fund market is a market
Market of orange Loanable fund market
2
, Good Oranges Loanable funds
Suppliers Farmers Savers, such as households
Demanders Grocery Shoppers Borrowers, such as firms
Price Price of orange Interest rate
Interest rate is the price of loanable fund
• Financial markets are where firms and governments obtain funds, or financing, for their operations
• These funds come primarily from household savings across the economy
• Loanable Funds Market: the market where savers supply funds for loans to borrowers
• Not a single physical location but includes places like stock exchanges, investment banks,
mutual fund firms, and commercial banks
• The suppliers of the funds are those who save, include households and foreign entities
• Households are private individuals and families
• Foreign entities include foreign governments, firms, and private citizens that choose to save in
the U.S.
• If you have a checking or savings account at a bank —> you are a supplier of loanable funds
• You deposit funds in your account, these funds don’t sit in a vault —> banks loan ut the
majority of these funds
• Household savings in retirement accounts, stocks, bonds, and mutual funds are
other big sources of loanable funds
• The demanders or borrowers, of loanable funds include firms and governments
• Firms borrow to invest, to buy tools and equipment, and to build factories —> firms looking to
produce output in the future must borrow to pay their expenses today
3
Guided notes
Chapter 9 Savings, interest rates, and the market for loanable funds
Big Questions to study
A. What is the loanable funds market?
• The loanable funds markets connects savers with borrowers
• Savers are suppliers of loanable funds, and they earn interest as a reward for saving
• Borrowers are the buyers of loanable funds, and they pay interest as the cost of borrowing
B. What factors shift the supply of loanable funds?
• Changes in income and wealth shift the supply of loanable funds
• Changes in time preferences also affect the supply of loanable funds
• Consumption smoothing is another factor that shifts the loanable funds supply
C. What factors shift the demand for loanable funds?
• Capital productivity affects the demand for loanable funds
• Investor confidence also affects the demand for loanable funds
D. How do we apply the loanable funds market model?
• We can use the loanable funds market model to examine real-world changes in both supply and
demand for loanable funds
• The loanable funds model also clarifies the important conclusion that every dollar borrowed requires a
dollar saved
Flow of chapter 9
1
, 1. Loanable funds market: market for loans
2. Supply of loans (savings)
- Move along the curve vs shift of the curve
3. Demand for loans (borrowings)
- Move along the curve vs shift of the curve
4. Put supply and demand together
- Market equilibrium
Motivating example:
How much are we saving?
A. What is the loanable funds market?
Loanable fund market:
- channel the good from suppliers to demanders
- Suppliers: savers (households) supply savings to banks.
- Demanders: borrowers, such as firms and governments demand loans, banks loan out the money
to borrowers.
- Good: loans
Middle person in the loanable fund market: a bank
With loanable funds ! Firms can borrow and invest.
With investments ! Firms can produce
When firms produce ! GDP of the economy increases.
Savings → borrowing → investment → GDP growth
Loanable fund markets make the above chain possible.
Loanable fund market is a market
Market of orange Loanable fund market
2
, Good Oranges Loanable funds
Suppliers Farmers Savers, such as households
Demanders Grocery Shoppers Borrowers, such as firms
Price Price of orange Interest rate
Interest rate is the price of loanable fund
• Financial markets are where firms and governments obtain funds, or financing, for their operations
• These funds come primarily from household savings across the economy
• Loanable Funds Market: the market where savers supply funds for loans to borrowers
• Not a single physical location but includes places like stock exchanges, investment banks,
mutual fund firms, and commercial banks
• The suppliers of the funds are those who save, include households and foreign entities
• Households are private individuals and families
• Foreign entities include foreign governments, firms, and private citizens that choose to save in
the U.S.
• If you have a checking or savings account at a bank —> you are a supplier of loanable funds
• You deposit funds in your account, these funds don’t sit in a vault —> banks loan ut the
majority of these funds
• Household savings in retirement accounts, stocks, bonds, and mutual funds are
other big sources of loanable funds
• The demanders or borrowers, of loanable funds include firms and governments
• Firms borrow to invest, to buy tools and equipment, and to build factories —> firms looking to
produce output in the future must borrow to pay their expenses today
3
