Macroeconomics

‭Factors that Shift the Supply of Loanable Funds Curve‬ ‭The‬ ‭supply‬ ‭of‬ ‭loanable‬ ‭funds‬ ‭is‬ ‭mainly‬ ‭affected‬ ‭by‬‭changes‬‭in‬‭savings‬‭levels‬‭and‬‭behaviors‬ ‭.‬‭Such‬ ‭changes include the following:‬ ‭●‬ ‭Changes‬‭in‬‭Consumers’‬‭Saving‬‭Behaviors:‬ ‭When‬‭people‬‭save‬‭more‬‭due‬‭to‬ ‭an‬‭increase‬‭in‬‭their‬ ‭wealth‬ ‭or‬ ‭a‬‭general‬‭preference‬‭for‬‭saving‬ ‭,‬‭the‬‭supply‬‭of‬‭loanable‬‭funds‬‭increases.‬‭This‬‭shifts‬ ‭the‬‭S‬ ‭LF‬ ‭curve‬‭to‬‭the‬‭right.‬‭The‬‭opposite‬‭is‬‭true‬‭when‬‭people‬‭save‬‭less‬‭(S‬ ‭LF‬ ‭decreases‬‭and‬‭shifts‬ ‭to the left).‬

‭●‬ ‭Changes‬ ‭in‬ ‭Private‬ ‭Savings:‬ ‭When‬ ‭private‬ ‭savings‬ ‭increase,‬ ‭due‬ ‭to‬ ‭lower‬ ‭income‬ ‭taxes‬ ‭for‬ ‭example,‬ ‭the‬ ‭supply‬ ‭of‬ ‭loanable‬ ‭funds‬ ‭increases‬ ‭(S‬ ‭LF‬ ‭shifts‬ ‭to‬ ‭the‬ ‭right),‬ ‭and‬ ‭vice‬ ‭versa.‬ ‭For‬ ‭instance,‬ ‭if‬ ‭a‬ ‭worker’s‬ ‭income‬‭is‬‭$1,000‬‭and‬‭that‬ ‭worker‬ ‭pays‬ ‭$100‬ ‭in‬ ‭taxes‬ ‭and‬ ‭spends‬ ‭$300‬ ‭on‬ ‭consumption,‬ ‭the‬ ‭worker’s‬ ‭private‬ ‭savings‬ ‭are‬ ‭$600.‬ ‭If‬ ‭taxes‬ ‭decrease‬ ‭to‬ ‭$50,‬ ‭the‬ ‭worker’s‬ ‭savings‬ ‭will‬ ‭increase‬ ‭to‬ ‭$650.‬ ‭This‬ ‭increases‬ ‭the‬ ‭amount of funds supplied in the market.‬

‭●‬ ‭Changes‬‭in‬‭Net‬‭Capital‬‭Inflows:‬ ‭When‬‭capital‬‭inflows‬‭increase‬‭(fnancial‬‭capital‬‭coming‬‭into‬‭the‬ ‭country‬ ‭from‬ ‭abroad),‬ ‭more‬ ‭funds‬ ‭become‬ ‭available‬ ‭for‬ ‭lending,‬‭thus‬‭increasing‬‭the‬‭supply‬‭of‬ ‭loanable‬ ‭funds‬ ‭(S‬ ‭LF‬ ‭shifts‬ ‭to‬ ‭the‬ ‭right).‬ ‭Alternatively,‬ ‭when‬‭domestic‬‭capital‬‭outflows‬‭increase‬ ‭(fnancial‬ ‭capital‬ ‭leaving‬ ‭the‬ ‭country‬ ‭such‬ ‭as‬ ‭an‬ ‭American‬ ‭citizen‬ ‭buying‬ ‭a‬ ‭bond‬ ‭from‬ ‭the‬ ‭government‬ ‭of‬ ‭Japan),‬ ‭the‬ ‭amount‬ ‭of‬ ‭funds‬ ‭available‬ ‭in‬ ‭the‬ ‭country‬ ‭(in‬ ‭the‬ ‭U.S.‬ ‭in‬ ‭this‬ ‭case)‬ ‭drops, which reduces the supply of loanable funds (S‬ ‭LF‬ ‭shifts to the left).‬ ‭●‬ ‭Government‬ ‭Policies:‬ ‭Anything‬ ‭that‬ ‭affects‬ ‭national‬ ‭savings‬ ‭(public‬ ‭savings‬ ‭+‬ ‭private‬ ‭savings),‬ ‭has‬ ‭an‬ ‭impact‬ ‭on‬ ‭the‬ ‭supply‬ ‭of‬ ‭loanable‬‭funds.‬ ‭For‬‭example,‬‭a‬‭budget‬‭defcit‬‭that‬ ‭makes‬ ‭public‬ ‭savings‬ ‭smaller‬ ‭reduces‬ ‭the‬ ‭supply‬ ‭of‬ ‭loanable‬ ‭funds‬ ‭(S‬ ‭LF‬ ‭shifts‬ ‭to‬ ‭the‬ ‭left).‬ ‭Alternatively,‬‭a‬‭budget‬‭surplus‬‭that‬‭makes‬‭public‬‭savings‬‭bigger‬‭increases‬‭the‬‭supply‬‭of‬‭loanable‬ ‭funds (S‬ ‭LF‬ ‭shifts to the right).‬ ‭Changes in the Loanable Funds Market Equilibrium‬ ‭In‬‭essence,‬‭equilibrium‬‭in‬‭the‬‭loanable‬‭funds‬‭market‬‭is‬‭achieved‬‭where‬‭the‬‭quantity‬‭of‬‭loans‬‭demanded‬ ‭by‬‭borrowers‬‭(D‬ ‭LF‬ ‭)‬‭is‬‭equal‬‭to‬‭the‬‭quantity‬‭of‬‭loans‬‭supplied‬‭by‬‭savers‬‭(S‬ ‭LF‬ ‭).‬‭These‬‭market‬‭forces‬‭drive‬ ‭real interest rate toward equilibrium.‬ ‭Below‬ ‭is‬ ‭a‬ ‭summary‬ ‭of‬ ‭how‬ ‭changes‬ ‭in‬ ‭the‬ ‭demand‬ ‭and‬ ‭supply‬ ‭curves‬ ‭of‬ ‭loanable‬ ‭funds‬ ‭affect‬ ‭the‬ ‭equilibrium‬ ‭interest‬ ‭rate‬ ‭and‬ ‭quantity‬ ‭of‬ ‭loanable‬ ‭funds.‬ ‭Assume‬ ‭that‬‭in‬‭the‬‭corresponding‬‭graph,‬‭the‬ ‭initial equilibrium is a point X.‬

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