Return to Contents Page

 


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.

Equilibrium

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

Supply

Ex:  Saving for Retirement (not available yet)

Demand for Loanable Funds

Demand

Ex:  Borrowing to Finance Education (not available yet)

Views

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


 

Return Link:  Contents

Comments?  Questions?  macro-at-econmodel-dot-com  Copyright 2006 William R. Parke