The loanable funds market

Loanable Funds Market

• The market savers and borrowers exchange funds (QLF) at the real rate of interest (r%)
• Demand for loanable funds or borrowing comes from households, firms, government, and foreign sector
• Demand for the loanable fund is in fact supply of bonds
• Supply of loanable fund or saving comes from the household, firms, government, and foreign sector
• Supply of loanable fund is also demand for bonds

Changes in Demand for Loanable Funds

• Demand for loanable fund = borrowing (i.e. supplying bonds)
• More borrowing = more demand for the loanable fund (shift to the right)
• Less borrowing = less demand for the loanable fund (shift to the left)
• Examples:
• Government deficit spending = more borrowing = more demand for loanable fund = DLF shift to the right = real interest rate (r%) increase
• Less investment = less borrowing = less demand for loanable fund = DLF shift to the left = real interest rate (r%) decrease 

Changes in Supply of Loanable Funds

• Supply of loanable funds = saving (i.e. demand for bonds)
• More saving = more supply of loanable fund (shift to the right)
• Less saving = less supply of loanable fund (Shift to the left)
• Examples:
• Government budget surplus = more saving = more supply of loanable fund = SLF shift to the right = r% decrease
• A decrease in consumers' MPS = less saving = less supply of loanable fund = SLF shift to the left = r% increase