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Title: Economics
Description: 1st year Undergraduate BSc Accounting and finance Introduction to economics loanable funds market
Description: 1st year Undergraduate BSc Accounting and finance Introduction to economics loanable funds market
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Finance, Saving and Investment
Learning Outcomes
Describe the flow of funds through financial markets
and institutions
Explain how investment and saving and borrowing and
lending decisions are made and interact in the loanable
funds market
Explain how a government deficit (or surplus) influences
the real interest rate, saving and investment
Explain how international borrowing and lending
influence the real interest rate, saving and investment
Introduction To Economics
On 17 September 2007, long queues of depositors wanting
to withdraw their funds formed outside the branches of the
mortgage lender Northern Rock
...
How are these two events connected?
They are connected through the global financial market
that you study in this chapter
...
These funds are supplied and demanded in three types of
financial markets:
♦ Loan markets
♦ Bond markets
♦ Stock markets
Introduction To Economics
Financial Institutions and
Financial Markets
Financial Institutions
Key financial institutions are
♦
♦
♦
♦
Commercial banks
Mortgage companies (building societies)
Pension funds
Insurance companies
Introduction To Economics
The Loanable Funds Market
The market for loanable funds is the aggregate of all the
individual financial markets
...
2 on the next slide illustrates the flows of funds
that finance investment
...
The real interest rate is approximately equal to the
nominal interest rate minus the inflation rate
...
Introduction To Economics
The Loanable Funds Market
The Real Interest Rate
25
3 month nominal rate
3 month nominal rate
RPI
3 month real rate
20
15
10
5
0
1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
1994 1998 2002 2006 2010 2014
-5
Introduction To Economics
The Loanable Funds Market
The market for loanable funds determines the real interest
rate, the quantity of funds loaned, saving and investment
...
The Demand for Loanable Funds
The quantity of loanable funds demanded depends on:
1 The real interest rate
2 Expected profit
Introduction To Economics
The Loanable Funds Market
The Demand for Loanable Funds Curve
Figure 23
...
A rise in the real interest
rate decreases the quantity
of loanable funds
demanded
...
Introduction To Economics
The Loanable Funds Market
Changes in the Demand for Loanable Funds
When the expected profit changes, the demand for
loanable funds changes
...
Introduction To Economics
The Loanable Funds Market
The Supply of Loanable Funds
The quantity of loanable funds supplied depends on
1 The real interest rate
2 Disposable income
3 Expected future income
4 Wealth
5 Default risk
Introduction To Economics
The Loanable Funds Market
The Supply of Loanable Funds Curve
Figure 23
...
A rise in the real interest
rate increases the quantity
of loanable funds supplied
...
Introduction To Economics
The Loanable Funds Market
Changes in the Supply of Loanable Funds
A change in disposable income, expected future income,
wealth or default risk changes the supply of loanable
funds
...
Introduction To Economics
The Loanable Funds Market
Figure 23
...
Equilibrium occurs at a
real interest rate of 6 per
cent a year
...
At 5 per cent a year, there
is a shortage of funds and
the real interest rate rises
...
Volatility comes from fluctuations in either the demand
for loanable funds or the supply of loanable funds
...
They also bring fluctuations in asset prices
...
6(a) illustrates
an increase in the
demand for loanable
funds
...
Introduction To Economics
The Loanable Funds Market
Figure 23
...
If one of the influences on
saving plans changes and
saving increases, the
supply of funds increases
...
♦ A government budget surplus increases the supply of
funds
...
Introduction To Economics
Government in the Loanable
Funds Market
Figure 23
...
A government budget
surplus increases the
supply of funds
...
8 illustrates the
effect of a government
budget deficit
...
Introduction To Economics
The Global Loanable Funds Market
The loanable funds market is global, not national
...
Borrowers want to pay the lowest possible real interest
rate and they will seek it by looking around the world
...
Introduction To Economics
The Global Loanable Funds Market
Figure 23
...
The world equilibrium real interest rate is 5 per cent a year
...
The shortage of funds is made up by international borrowing
...
The excess quantity supplied goes to foreign borrowers
Title: Economics
Description: 1st year Undergraduate BSc Accounting and finance Introduction to economics loanable funds market
Description: 1st year Undergraduate BSc Accounting and finance Introduction to economics loanable funds market