| Posted on April 16, 2014 at 11:40 AM |
The loanable funds market shows the relationship between the real interest rate and quantity of loanable funds.
More savings: If there is an increase in savings by the private sector, the supply of loanable funds increases (shifts right) causing the real interest rate to fall. When the real interest rate decreases, investment spending increases. This is good for the growth of capital stock and long run economic growth.
Low real interest rates also depreciate the value of currency as foreigners are not attracted to the lower returns on bonds. When the currency depreciates, net exports increase as the goods look cheaper to foreigners.
Less savings: If there is a decrease in savings by the private sector, the supply of loanable funds decreases (shifts left) causing the real interest rate to rise. When the real interest rate increases, investment spending decreases. This is bad for the growth of capital stock and slows down the rate of long run economic growth.
High real interest rates also appreciate the value of currency as foreigners are more attracted to the higher returns on bonds. When the currency appreciates, net exports decrease as the goods look more expensive to foreigners.
AP Macroeconomics Unit 5 Macroeconomic Theory
Categories: AP Macroeconomics, Macro Unit 5 Macroeconomic Theory