Application 1: What if government’s budget deficit increases (hint: Gov Deficit=Gov Spending-
Tax collection)
- In the loanable funds market, the supply and demand for loanable funds determine the real
interest rate and the level of investment in the economy. The supply of loanable funds comes
from national savings, which includes private savings and public savings (government budget
surplus). The demand for loanable funds comes from borrowers, including the government
(government budget deficit) and private investors
- When the government's budget deficit increases:
Hình về demand và supply when gover deficit increases
+ Effect on Demand for Loanable Funds:
- An increase in the government's budget deficit means that the government
needs to borrow more money to finance its spending. This increases the demand
for loanable funds in the economy. The government competes with other
borrowers for available funds, which can lead to an increase in the real interest
rate in the short run.
- we can show an upward shift in the demand for loanable funds curve. This shift
indicates an increase in the demand for loanable funds due to the government's
budget deficit.
+ Effect on Supply of Loanable Funds:
- The government's budget deficit also affects the supply of loanable funds. A
budget deficit means that the government is spending more than it is collecting
in revenue, which reduces public savings. As a result, the supply of loanable funds
decreases.
- a leftward shift in the supply of loanable funds curve. This shift indicates a
decrease in the supply of loanable funds due to the government's budget deficit.
Overall Effect: The combined effect of the increase in demand for loanable funds
and the decrease in supply of loanable funds can lead to an increase in the real
interest rate. This can affect investment decisions by private investors, as higher
interest rates make borrowing more expensive. It can also impact economic growth
and the allocation of resources in the economy.
Application 2: Increase in the household savings rate ( Saving rate= Saving/Disoisable income)
-When there is an increase in the household savings rate, it affects the loanable funds
market
+ Effect on Supply of Loanable Funds:
- An increase in the household savings rate means that households are saving a larger
portion of their income. This increases the supply of loanable funds in the economy. As
households save more, they have more funds available to lend or invest, which increases
the supply of loanable funds
- a rightward shift in the supply of loanable funds curve. This shift indicates an increase
in the supply of loanable funds due to the increase in household savings rate.
+ Effect on Demand for Loanable Funds:
- The increase in the household savings rate does not directly affect the demand for
loanable funds. The demand for loanable funds comes from borrowers such as firms
that need funds for investment projects. However, an increase in household savings can
indirectly affect the demand for loanable funds by influencing investment decisions.
Overall Effect: The combined effect of the increase in the supply of loanable funds and
the potential indirect effect on investment decisions can lead to a decrease in the real
interest rate. With more funds available for lending or investment, the cost of borrowing
decreases, which can incentivize firms to undertake more investment projects. This can
stimulate economic growth and increase the level of investment in the economy
Application3: Suppose the foreign supply of credit increases
When there is an increase in the foreign supply of credit, it affects the loanable funds
market
- Effect on Supply of Loanable Funds:
+ An increase in the foreign supply of credit means that there are more funds available
for lending or investment from foreign sources. This increases the supply of loanable
funds in the economy. As foreign credit increases, there is a larger pool of funds that
can be accessed for investment purposes.
+ a rightward shift in the supply of loanable funds curve. This shift indicates an increase
in the supply of loanable funds due to the increase in foreign supply of credit.
- Effect on Demand for Loanable Funds: The increase in the foreign supply of credit
does not directly affect the demand for loanable funds. The demand for loanable funds
comes from borrowers such as households and firms that need funds for various
purposes. However, the availability of foreign credit can indirectly affect the demand for
loanable funds by influencing investment decisions.
Overall Effect: The combined effect of the increase in the supply of loanable funds and
the potential indirect effect on investment decisions can lead to a decrease in the real
interest rate. With more funds available for lending or investment, the cost of borrowing
decreases, which can incentivize households and firms to undertake more investment
projects. This can stimulate economic growth and increase the level of investment in the
economy.
Application 4: Expansionary montery policy
-Expansionary monetary policy aims to stimulate economic growth by increasing the
money supply and lowering interest rates
- Loanable Funds Market: In the loanable funds market, expansionary monetary policy
can be shown as a rightward shift in the supply of loanable funds curve. This shift
indicates an increase in the availability of funds for borrowing and investment due to
the expansionary policy. As a result, the equilibrium interest rate decreases, encouraging
more borrowing and investment ( hình vẽ)
- Aggregate Demand and Aggregate Supply (AD/AS) Model: In the AD/AS model,
expansionary monetary policy can be illustrated as a rightward shift in the aggregate
demand curve. This shift indicates an increase in overall spending in the economy due
to the effects of expansionary policy. The increase in spending leads to higher output
and price levels.
Application 5: Increase in expected inflation
