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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