ECON 202 Lecture Notes - Lecture 11: Loanable Funds
Document Summary
The supply of loanable funds comes from saving: households: with extra income can loan it out and earn interest, public saving: if positive, adds to national saving and the supply of loanable funds. An increase in the interest rate makes saving more attractive, which increases the quantity of loanable funds supplied. The demand for loanable funds comes from investment. Firms borrow the funds they need to pay for new equipment, factories, etc. A fall in the interest rate reduces the cost of borrowing, which increases the quantity of loanable funds demanded. The interest rate adjusts to equate supply and demand. Credit crunch: more borrowers at current interest rate than lenders (saving money) Quantity supplied is lower than quantity demanded. Low interest rates: more borrowers than lenders. Tax incentives for saving, such as reducing capital gains tax,increase the supply of l. f. Which reduces the eq", interest rate and increases the eq"m quantity of lf.
