Loanable Funds Market
Explanation
The Loanable Funds Market describes the interaction between borrowers and savers of money. The real interest rate is adjusted so that the amount of borrowing is equal to the amount of saving.
In this space, an explanation of the desired shift will appear.
As the rate of return on an investment increases, the demand for loanable funds also increases because the borrowers are persuaded to take out a loan.
As the rate of return on an investment decreases, the demand for loanable funds also decreases because the borrowers are less persuaded to take out a loan.
Investment tax credits lower the cost of borrowing money at every real interest rate. Implementing this policy will increase the demand for loanable funds.
Investment tax credits lower the cost of borrowing money at every real interest rate. Removing this policy will decrease the demand for loanable funds.
As someone saves more money (for example: in a bank), the supply of loanable funds increases as the intermediary (the bank) can lend that money to a borrower.
As someone saves less money (for example: in a bank), the supply of loanable funds decreases as the intermediary (the bank) has less money to lend to a borrower.
Capital inflows consist of foreign funds moving into an economy from another country, causing supply to increase.
Capital inflows consist of foreign funds moving into an economy from another country, causing supply to decrease.