Tuesday

 

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 18 of 25
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In Figure 1, market for loanable funds
· the equilibrium interest rate is 5 percent
· the quantity of loanable funds demanded = quantity of loanable funds supplied = $1,200 billion
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Saving represents supply of loanable funds.
Investment represents demand for loanable funds.
The market coordinates saving and investment with the price, which is the interest rate.
In the market for loanable funds when the interest rate adjusts to balance supply and demand, it coordinates
· behavior of people who want to save - the suppliers of loanable funds
· behavior of people who want to invest - the demanders of loanable funds
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We can use the Figure 1 model of the market for loanable funds to examine how change of government policies affect saving and investment in the economy.
To analyze changes of supply and demand in the market for loanable funds caused by change of government policy, we use the three steps we apply for any market
1- determine whether the policy change shifts the supply curve or the demand curve
2- determine the direction of the shift
3- determine how the equilibrium changes using the supply-and-demand diagram
For example, if the federal government decided to increase borrowing to fund more spending
1· this would affect the demand, shifting the demand curve
2· demand would increase, so demand curve would shift right
3· price, the interest rate, would rise
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determine how the equilibrium changes
kinkō ga dono yō ni henka suru ka o kettei
均衡がどのように変化するかを決定
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How sensitive is the interest rate to an increase of federal government borrowing? ChatGPT:
In the loanable funds supply and demand model, greater federal borrowing increases demand for funds, shifting the demand curve right, meaning the borrowing pushes interest rates upward.
However, the upward effect on the interest rate is usually moderate.
Interest rates may rise only slightly if private saving is abundant, foreign investors purchase U.S. debt (U.S. government bonds), or the Federal Reserve accommodates the government borrowing.
Here, “accommodate” means the Federal Reserve takes actions to increase the money supply.
By increasing the money supply the supply of lendable money is increased.
The supply curve shifts to the right holding down the amount of interest rate increase.