Macroeconomics

‭ ➔ ‬ ‭An‬ ‭upward-sloping‬ ‭supply‬ ‭curve‬ ‭of‬ ‭loanable‬ ‭funds‬ ‭(S‬ ‭LF‬ ‭)‬ ‭.‬ ‭This‬ ‭curve‬ ‭represents‬ ‭the‬ ‭total‬ ‭amount‬‭of‬‭loans‬‭supplied‬‭in‬‭the‬‭market,‬‭which‬‭is‬‭equivalent‬‭to‬‭total‬‭savings‬ ‭(since‬‭people’s‬ ‭savings‬‭are‬‭loaned‬‭out).‬‭The‬‭positive‬‭slope‬‭of‬‭the‬‭curve‬‭indicates‬ ‭a‬‭direct‬‭relationship‬‭between‬ ‭the‬ ‭real‬ ‭interest‬ ‭rate‬ ‭and‬ ‭the‬ ‭quantity‬ ‭supplied‬ ‭of‬ ‭loanable‬‭funds:‬ ‭As‬‭the‬‭real‬‭interest‬‭rate‬ ‭increases,‬ ‭the‬ ‭return‬ ‭on‬ ‭saving‬ ‭increases,‬ ‭hence‬ ‭increasing‬ ‭the‬ ‭quantity‬ ‭supplied‬ ‭of‬ ‭loanable‬ ‭funds because people are more encouraged to save, and vice versa.‬ ‭ ➔ ‬ ‭An‬ ‭equilibrium‬ ‭point‬ ‭that‬ ‭determines‬ ‭the‬ ‭equilibrium‬ ‭real‬ ‭interest‬ ‭rate‬ ‭and‬ ‭equilibrium‬ ‭quantity‬ ‭of‬ ‭loanable‬ ‭funds‬ ‭in‬ ‭the‬ ‭market‬ ‭at‬ ‭the‬ ‭intersection‬ ‭of‬ ‭D‬ ‭LF‬ ‭and‬ ‭S‬ ‭LF‬ ‭(point‬ ‭X‬ ‭in‬ ‭the‬ ‭graph‬‭below).‬‭The‬‭real‬‭interest‬‭rate‬‭adjusts‬‭until‬‭the‬‭quantity‬‭of‬‭savings‬‭supplied‬‭is‬‭equal‬‭to‬‭the‬ ‭quantity of loans demanded.‬

‭Since‬‭the‬‭real‬‭interest‬‭rate‬‭represents‬‭the‬‭cost‬‭of‬‭borrowing‬‭and‬‭the‬‭return‬‭on‬‭saving‬‭(i.e.,‬‭the‬‭“price”‬‭of‬ ‭loanable‬ ‭funds),‬ ‭any‬ ‭change‬ ‭in‬‭it‬‭will‬‭cause‬‭a‬‭movement‬‭along‬‭D‬ ‭LF‬ ‭and‬‭S‬ ‭LF‬ ‭curves‬‭as‬‭explained‬‭on‬‭the‬ ‭graph below.‬

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