Loanable funds market | Financial sector | AP Macroeconomics | Khan Academy

Summary

The video explains the market for loanable funds, where savers supply funds to be lent and borrowers demand funds to invest. The price in this market is the real interest rate. Supply and demand for loanable funds function similarly to other markets, with savers providing more funds at higher interest rates, and borrowers demanding more funds at lower rates. Shifts in demand can result from new business opportunities or government borrowing, while shifts in supply can occur if people save more. These shifts impact the equilibrium interest rate and quantity of loanable funds.

Takeaways

• 📊 The market for loanable funds involves the supply of funds (from savers) and the demand for funds (from borrowers).
• 💰 Savers are the suppliers in this market, offering their money to be lent out, often through intermediaries like banks.
• 📉 Borrowers create demand for loanable funds when they need capital for investments or business opportunities.
• 🏦 Banks serve as intermediaries by taking savers' deposits and lending them out, paying interest to savers and charging interest to borrowers.
• 📈 The real interest rate is the 'price' of loanable funds in this market, affecting both the supply from savers and the demand from borrowers.
• 🔺 As real interest rates rise, savers are more willing to supply funds, while borrowers demand fewer funds due to higher borrowing costs.
• 🔻 When real interest rates drop, demand for loans increases as borrowing becomes cheaper, while savers may supply fewer funds.
• 🚀 A shift in the demand curve for loanable funds can occur due to new business opportunities or increased government borrowing.
• 💼 If demand increases (e.g., new opportunities or government borrowing), the real interest rate rises to attract more loanable funds.
• 📉 A shift in the supply curve for loanable funds occurs if saving habits change, either increasing or decreasing the overall supply.

Q & A

What is the market for loanable funds?

The market for loanable funds refers to the market where funds that people are willing to supply to be lent out are matched with the funds that people want to borrow.

Who are the suppliers in the loanable funds market?

The suppliers in the loanable funds market are savers, who deposit money in banks or other financial institutions with the expectation of earning interest.

How do banks facilitate the loanable funds market?

Banks act as intermediaries in the loanable funds market by taking deposits from savers and lending those funds to borrowers, charging interest to the borrowers and paying interest to the savers.

Who are the demanders in the loanable funds market?

The demanders in the loanable funds market are borrowers, typically individuals or businesses looking to invest in opportunities or projects that require capital.

What is the role of interest rates in the loanable funds market?

Interest rates act as the price in the loanable funds market. They determine the cost of borrowing for demanders and the return on savings for suppliers.

What is the real interest rate and why is it important?

The real interest rate is the interest rate adjusted for inflation, which gives a more accurate representation of the real cost of borrowing or return on savings.

How does the supply of loanable funds respond to changes in real interest rates?

When real interest rates are higher, suppliers (savers) are more motivated to save, leading to an increase in the supply of loanable funds. Conversely, at lower real interest rates, the supply decreases.

What factors can cause a shift in the demand for loanable funds?

The demand for loanable funds can shift due to new business opportunities, increased government borrowing, or changes in the perceived attractiveness of investment projects.

What happens to the equilibrium in the loanable funds market when the demand curve shifts?

When the demand for loanable funds increases (shifts to the right), the equilibrium real interest rate rises and the quantity of loanable funds demanded also increases.

How might government policies affect the supply of loanable funds?

Government policies that encourage saving, such as marketing campaigns or educational initiatives, can increase the supply of loanable funds by shifting the supply curve to the right.

What is the effect on the loanable funds market if the savings rate decreases?

A decrease in the savings rate would shift the supply of loanable funds curve to the left, potentially leading to a higher real interest rate and a decrease in the quantity of loanable funds demanded at the new equilibrium.