This chapter is an important link in how we understand government policies today in the midst of the Covid-19 crisis. The Federal government is running record deficits in an attempt to avert or minimize a recession/depression. Look back at this chapter and discuss how this should affect the market for loanable funds. Is that what we have seen happen (where is the equilibrium interest rate now - up or down?) You should be left with a question - why have interest rates not increased?
How does the loanable funds market help define/choose which investment projects are funded each year?
The interest rate is the price of a loan and this rate will determine the demand for the money. The quantity of loanable funds demanded falls as interest rates rise as because a high interest rate makes borrowing more expensive. Conversely, a high interest rate makes saving more attractive, and the quantity of loanable funds rises as the interest rates rise.
In the US today, rates are historically low, 30 year fixed rate between 2-3% currently, this discourages savings as the rates are low. With savings low, the amount of money available should decrease, which would limit the availability and eventually, increase rates to equalize. This is not happening and the government is either selling bonds to foreign countries such as China or printing money and taking loans with increases our debt.
One reason the rates are not increasing is a move by regulators to artificially keep interest rates low to keep America spending. Saving is not lucrative, but buying is.
The loanable funds market can determine investment projects and policies by having the loanable funds market be funded by households and firms who wish to borrow and to make investments in particular projects.
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