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Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 9 The Real Economy in the Long Run
Chapter 26 of 36 Saving, Investment, and the Financial System
Section 16 of 25
…
Figure 1 – The Market for Loanable Funds
The interest rate in the economy adjusts to balance supply and demand for loanable funds.
The supply of loanable funds comes from national saving including
private saving and public saving.
Private savings is the amount of income households have left after consumption spending and taxes.
Public saving is the amount of tax revenue the government has left
spending (which is unusual, see Figure 1A).
The demand for loanable funds comes from firms and households that want to borrow for investment purposes.
In Figure 1 the equilibrium interest rate is 5 percent.
$1,200 billion of loanable funds are supplied and demanded.
…
The economy's market for loanable funds like other markets is governed by supply and demand.
The supply of loanable funds primarily comes from households, firms and government surpluses are also sources.
Lending can occur
· directly, as when a household buys a bond from a firm
· indirectly, as when a household makes a deposit in a bank, which in turn loans it out
In both direct and indirect cases, household saving is the primary source of loanable funds supply.
…
The demand for loanable funds comes from households and firms
who want to borrow to make investments.
To simplify this model public saving and borrowing are not included here.
The demand for loanable funds includes
· families taking out mortgages to buy new homes, about 30% of total
· firms borrowing to buy equipment and build factories, about 70% of total
In both households and firms cases, desire to invest is the cause of loanable funds demand.
…
The interest rate is the loan price, it represents
· the amount lenders receive on their savings
· the amount borrowers pay for loans
A high interest rate makes saving, supply of loanable funds, more attractive.
Supply of loanable funds increases.
A high interest rate makes investing, demand for loanable funds, less attractive.
Demand for loanable funds decreases.
... …
the interest rate is the price of borrowing
kinri wa kariire no kakaku
金利は借入の価格

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