Macroeconomics

‭Shifts of the Demand and Supply of Loanable Funds Curves‬ ‭Some‬ ‭changes‬ ‭in‬ ‭factors‬ ‭that‬ ‭exclude‬ ‭the‬ ‭real‬ ‭interest‬ ‭rate‬ ‭cause‬ ‭shifts‬‭in‬‭the‬‭demand‬‭and/or‬‭supply‬ ‭curves‬‭of‬‭loanable‬‭funds.‬‭Similar‬‭to‬‭previous‬‭demand‬‭and‬‭supply‬‭curves,‬ ‭an‬‭increase‬‭is‬‭illustrated‬‭by‬‭a‬ ‭shift of the curve to the right‬ ‭, whereas‬ ‭a decrease‬‭is illustrated by a shift to the left‬ ‭as seen below.‬

‭Factors that Shift the Demand for Loanable Funds Curve‬ ‭In‬ ‭general,‬ ‭changes‬ ‭in‬ ‭consumption‬ ‭and‬ ‭investment‬ ‭affect‬ ‭the‬ ‭demand‬ ‭for‬ ‭loanable‬‭funds‬ ‭.‬‭This‬‭is‬ ‭because‬ ‭loans‬ ‭are‬ ‭sought‬ ‭for‬ ‭either‬ ‭consumption‬ ‭purposes‬ ‭(e.g.,‬ ‭buying‬ ‭a‬ ‭car‬ ‭or‬ ‭a‬ ‭house)‬ ‭or‬ ‭for‬ ‭investment purposes (e.g., starting a business). These factors can be narrowed down to the following:‬ ‭●‬ ‭Changes‬ ‭in‬ ‭the‬ ‭Anticipated‬ ‭Rates‬ ‭of‬ ‭Return‬ ‭on‬ ‭Investment:‬ ‭These‬ ‭changes‬ ‭occur‬ ‭due‬ ‭to‬ ‭several‬ ‭reasons.‬ ‭In‬ ‭general,‬ ‭when‬ ‭the‬ ‭economy‬ ‭is‬ ‭performing‬ ‭well,‬ ‭the‬ ‭rate‬ ‭of‬ ‭return‬ ‭on‬ ‭investment‬ ‭increases,‬ ‭stimulating‬ ‭the‬ ‭demand‬ ‭for‬‭loanable‬‭funds‬‭and‬‭shifting‬‭the‬‭D‬ ‭LF‬ ‭curve‬‭to‬ ‭the‬ ‭right.‬‭The‬‭opposite‬‭is‬‭true‬‭when‬‭the‬‭economy‬‭is‬‭not‬‭doing‬‭well.‬‭Other‬‭factors‬‭that‬‭increase‬ ‭the‬‭return‬‭on‬‭investment‬‭include‬‭optimism,‬‭high‬‭expectations‬‭of‬‭economic‬‭well-being,‬‭and‬‭new‬ ‭business opportunities.‬ ‭●‬ ‭Government‬‭Policies:‬ ‭The‬‭government‬‭might‬‭also‬‭need‬‭to‬‭borrow‬‭funds,‬‭making‬‭it‬‭a‬‭demander‬ ‭of‬‭loanable‬‭funds.‬‭In‬‭general,‬ ‭a‬‭government‬‭demands‬‭funds‬‭when‬‭it‬‭runs‬‭a‬‭budget‬‭defcit‬ ‭(T‬‭<‬ ‭G).‬‭In‬‭this‬‭case,‬‭the‬‭government’s‬‭tax‬‭revenues‬‭are‬‭not‬‭suffcient‬‭to‬‭cover‬‭its‬‭spending‬‭(negative‬ ‭public‬‭savings);‬‭therefore,‬‭it‬‭needs‬‭to‬‭borrow.‬‭This‬‭increases‬‭the‬‭demand‬‭for‬‭loanable‬‭funds‬‭and‬ ‭shifts D‬ ‭LF‬ ‭to the right.‬ ‭Alternatively,‬ ‭when‬‭the‬‭government‬‭runs‬‭a‬‭budget‬‭surplus,‬‭it‬‭has‬‭positive‬‭public‬‭savings‬‭(T‬‭>‬ ‭G)‬ ‭and‬ ‭will‬‭no‬‭longer‬‭need‬‭to‬‭borrow‬ ‭.‬‭This‬‭reduces‬‭the‬‭demand‬‭for‬‭loanable‬‭funds‬‭and‬‭shifts‬ ‭D‬ ‭LF‬ ‭to the left.‬ ‭Other‬ ‭government‬ ‭policies‬ ‭that‬‭encourage‬‭investment‬‭(e.g.,‬‭investment‬‭tax‬‭credits‬‭that‬‭reduce‬ ‭the cost of borrowing), also affect D‬ ‭LF‬ ‭(increase‬‭it in this case).‬

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