Market for Loanable Funds

#1 #2
S2
S 1
S1

r2 r2
r1 r1

D2
D1 D1

I1 I2 I2 I1
S1 S2 S2 S1

Add a Supply Curve & show the equilibrium Add a Demand Curve & show the equilibrium
Draw an increase in Demand (a shift in the Draw an decrease in Supply (a shift in the curve,
curve, not a movement along the curve) & show not a movement along the curve) & show the
the new equilibrium new equilibrium

As a result of the increase in demand, theory
predicts the interest rate should go _up__
Overall, investment will go __up__
This will make the economy grow more:
(quickly / slowly)
As a result of the decrease in supply, theory
predicts the interest rate should go __up__
Overall, investment will go __down__
This will make the economy grow more:
(quickly / slowly)

The reasons demand would increase:
 New technology
 Improved investor sentiments (optimism)
 Improved government policy towards
investment (larger ITC’s)
The reason supply would decrease:
 Increased consumer confidence
 Decrease consumer patience
 Decrease disposable income, maybe
 Worsened government policy towards
savings
 Decrease in government budget surplus
(or increase in government budget
deficit)

#3 Reasons the real interest rate would increase:

Potential Funds Shortage from a(n):
 Increase in Loanable Funds Demand
o New technology
o Improved investor sentiments (optimism)
o Improved government policy towards investment (larger ITC’s)
 Decrease in Loanable Funds Supply
o Increased consumer confidence
o Decrease consumer patience
o Decrease disposable income, maybe
o Worsened government policy towards savings
o Decrease in government budget surplus (or increase in gov. budget deficit)
#4 #5
1
S S1
S2

r1 r1
r2 r2

D2 D1 D1
I2 I1 I1 I2
S2 S1 S1 S2
Fully label above graph. Fully label above graph.

Add a Supply Curve & show the equilibrium Add a Demand Curve & show the equilibrium
Draw an decrease in Demand (a shift in the Draw an increase in Supply (a shift in the curve,
curve, not a movement along the curve) & show not a movement along the curve) & show the
the new equilibrium new equilibrium

As a result of the decrease in demand, theory
predicts the interest rate should go _down_
Overall, investment will go __down_
This will make the economy grow more:
(quickly / slowly)
As a result of the increase in supply, theory
predicts the interest rate should go _down__
Overall, investment will go __up___
This will make the economy grow more:
(quickly / slowly)

The reasons demand would decrease:
 Worsened investor sentiments
(pessimism)
 Worsened government policy towards
investment (smaller ITC’s)
The reason supply would increase:
 Decreased consumer confidence
 Increase consumer patience
 Increase disposable income, maybe
 Improved government policy towards
savings
 Increase in government budget surplus
(or decrease in government budget
deficit)

#6 Reasons the real interest rate would decrease:

Potential Funds Surplus from a(n):
 Decrease in Loanable Funds Demand
o Worsened investor sentiments (pessimism)
o Worsened government policy towards investment (smaller ITC’s)
 Increase in Loanable Funds Supply
o Decreased consumer confidence
o Increase consumer patience
o Increase disposable income, maybe
o Improved government policy towards savings
o Increase in government budget surplus (or decrease in gov. budget deficit)
NOTE: This page is just the opposite of the previous page (except technology can’t be reversed)