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The Role of Loanable Funds

Simple macro models are often expressed in terms of goods, money, and bonds.  The latter can be broadly interpreted to include all long-term financial assets.  Here, we call this loanable funds.


relate this to NIPA (National Income and Product Accounts).  types of loanable funds.

Y = C + I + G and Y = C + S + T.  nnnn:  S = Y - C - T.  Eventually, I + G - T = S.   Therefore, S(Y,R) = I(R) + G - T.

Supply of Loanable Funds


Ex:  Saving for Retirement (not available yet)

Demand for Loanable Funds


Ex:  Borrowing to Finance Education (not available yet)


All the classical and Keynesian theories are consistent with a market for loanable funds.  They disagree about the implications.

The IS Curve

The interest rate R also clears the supply and demand for money.  Y adjusts to achieve equilibrium.

The Classical View

Y is already determined by real factors of production.  R adjusts to achieve equilibrium in the supply and demand for loanable funds.  The interest rate does not go anywhere.

Open-Economy Version


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