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.
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.
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