The Financial System
Shifts in the Market for Loanable Funds
Demand Shifts in the Market for Loanable Funds
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So just like any other market that we've discussed with supply and demand, our market for low noble funds can shift the supply and demand. Just the same. All right. Let's see some of the things that can shift our demand and supply in the market for low nable funds. So let's start here with the demand. What are things that can make the demand for low noble funds shift? Remember the demand. This is the firm's wanting money, right? The firms want needing money to invest. But we're also going to discuss the idea that the government also might need low nable funds. Right? If the government is in a deficit position, they might need funds to borrow as well. So let's think about things that can shift the demand. Okay? So let's start here with our first one. The firm's change in expectations of future profit. Okay. So if all of a sudden something happens that changes the expectations of future profit. Well, that's going to change the demand, right? If they think they can make more money in the future, Well, they're gonna want to invest more right now, if they think that the outlook of the future looks grim, there might invest less. Right? So, an idea here is an increase in available technology, right? If let's say the internet just suddenly got invented. Well, that creates a whole bunch of new opportunities, right? So, we'll say here increase expectations on this graph and this will be decreased expectations of profit, right? We're thinking about profit in the future. So if there's an increased expectation of profit. Well, guess what? There's going to be an increase in demand. So we've got our supply curve here or demand curve downward demand and we'll have this new demand curve out here. And what's gonna happen in that case, if this was our original, we'll use our previous little devices here. So our new equilibrium is up there. So what do we have? We have our rate one, remember, this is interest rates here And this is going to be the quantity of funds. We'll rate one and Quantity one. So we're gonna have an increase in the rate and an increase in the quantity right to rate to and quantity to both of them are going to increase with this increase in demand. Just like we saw before when we first studied supply and demand. Now the opposite. If there's a decrease in expectations, right? I'll put our here R. Q. Right? So in this case we're gonna have a decrease in demand and that would be this way, right? We're gonna shift the demand this way. So this being our original equilibrium, our new equilibrium. Well, guess what? The opposite is gonna happen here, right? We're going to have our one Q one and we're gonna have a decrease what? A decrease to our two and a decrease to Q2, right? And that's the decrease in expectations. So it's whether it's a good thing or a bad thing for demand, right? Does it, is it going to increase, demand, increase, expectation of profit? Well, we want to make more investments, right? So let's go on to the next one here. So the next one is a change in corporate tax rates. So this is going to affect firms as well, right? If there's a change in the tax rates, so what do you think is gonna happen if there's increased taxes in the case of increased taxes and this one will do decreased taxes? Well, if there's more tax that's bad for the firm's right, they have more cost now and they're gonna be less likely to invest. So if this was our original equilibrium here, if taxes went up, well, our demand for low noble funds would go down, right? They have more costs to cover now with increased taxes and we're gonna have this decrease in our demand for low noble funds leading to a decreased interest equilibrium and a decrease quantity as well. Okay, Just like we're used to with supply and demand, and obviously, we'll see the opposite here, with a decrease in taxes. Now, they have more money available, there's a decrease in their taxes, they have more reason to invest, right? They see basically a better outlook in the future with lower taxes, they can make more more money because they'll have to pay less taxes on it. Cool. So now, in this case we have the opposite effect supply demand where we have an increase to our rate, our equilibrium rate goes up, the quantity demanded goes up because of these change in corporate taxes. You see everything there, let's do one more on the next page. It's our last shift in demand and that's due to government. This is the government change in governments needs for funds. So the idea here is if the budget, if the government basically running a deficit, they need funds to cover their deficit, whereas if they're running a surplus, they're not gonna need funds, don't need funds. Alright, So most of the time when we think about the government, we're thinking about the savings, right? The government has a a part in the national savings there, the public savings here, but there is an effect that the government has on the demand for funds when they do need them. Right? So, if they need funds, well, if they're running a deficit, guess what, they're gonna shift the demand to the right, because there's now more of a need for funds, and we'll end up here in this situation up here. So, we'll see our rate having increased, and our quantity demanded increased as well, our equilibrium is going to increase as well. Right? Just like we see there at our new equilibrium and the opposite here, when they don't need funds, Well, that's going to decrease the demand there. So once they move from a place of needing funds, and now they don't need funds. Well, we'll have this decrease here, we will move to our new equilibrium down here. So this being our original equilibrium. Now we move to a new equilibrium with a lower rate and a lower quantity demanded. Cool. So little flashbacks here earlier lessons right? Where we're talking about supply and demand? Well, this is a macroeconomic application of it here. Cool, Alright. Let's pause here, and let's do a practice problem related to these shifts.
The scientists at University of Coloralabaska have discovered an insanely efficient teleportation device useful that revolutionized the shipping and delivery industry. How would this invention affect the market for loanable funds?
Demand for loanable funds would increase, leading to a higher equilibrium interest rate
Demand for loanable funds would increase, leading to a lower equilibrium interest rate
Demand for loanable funds would decrease, leading to a higher equilibrium interest rate
Demand for loanable funds would decrease, leading to a lower equilibrium interest rate
Supply Shifts in the Market for Loanable Funds
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So now let's see what things will shift the supply in the market for low noble funds. Okay, so remember the supply, it comes from savings, specifically the savings of the households and the savings of government and remember we called these private savings and public savings, the savings of the government. So guess what? It's gonna shift either from the household savings or the government savings. So let's start with the households, there could be a change in the incentives for households to save. So an example would be tax benefits from a four oh one K. Right? So if those incentives increase, if there's some reason that the government might give them more reason to save, such as oh you can get tax breaks for saving, Well that is going to increase the supply of low noble funds. So I'll say increased incentives and that would generally come in the form of tax breaks, incentives and decreased incentives. Over here. Now remember just like when we studied supply and demand, a change in the interest rate alone would only move us along the curve, right? It would only move us along the curve because interest is the price in this market. So if you remember when we discuss supply and demand, you might even want to go back. Just a change in the price itself is not going to shift the curves, it, whoa, shift the supply or demand. It just moves us along the curves. So the interest rate itself being the price in this market would only move us along the curve. There has to be some outside factor such as an increased incentive to save. That would lead us to have a greater supply. Cool. So that's exactly what's going on here. So if there's increased incentives, there's going to be increased supply. So there would be a supply out here Leading us to S. two. And what would happen in this market? Well, if we increase the supply, our equilibrium rate was originally here, our equilibrium quantity here, and now we're out here, right, We have this new equilibrium at this lower rate R. Two, and we'll have a greater quantity available, right? Because there's more savings happening, there's increased incentive to save. So there's more savings happening, lowering the interest rate and increasing the quantity available. Now, what about if we decrease the incentives, the opposite would happen. Right? So now there's less tax breaks that you get for saving. Well, people might save less, leading us to have a decrease in supply. And what's gonna happen in this case? So a decreased supply. Well, our new equilibrium is here. So, since there's a decreased supply, well, that's going to increase the price of what is available, right? And we will have a lower quantity available because of the supply decrease. So we see this increase. Let me do that in a different color, just like before we've got this increased rate and we've got this decreased quantity, right, equilibrium quantity there. Cool. So that's the household's incentives it comes from the incentive to save. How about the government? Well, it goes back to that idea of the government trade, excuse me, budget surplus or budget deficit. So remember that the government's gonna have a surplus when they bring in tax revenue and they don't spend all of it. So the tax revenue is greater, then it's spending, right? Compared to the deficit, which is the opposite is where they don't have enough tax revenue to cover the spending is less than spending, right? Tax revenue is less than spending. So what is that? Public savings recall that that's the amount of tax revenue left after the government has paid for its spending. So only in the case of a surplus, would we have a situation where we actually have public savings, Right? Because in a deficit while the tax revenue didn't cover the government purchases? So if the government is running a budget deficit, it is not contributing to national savings, right? Because they are essentially borrowing money. So, if those savings are not in the supply, right, Savings, remember that's the supply of vulnerable funds comes from savings, be it private or public. So, in the case of, uh we'll say no public savings because they're in a deficit, or yes, public savings because they're in a surplus situation. Right? So, we'll say that here to deficit surplus. Right? So what happens if there's no public savings? Well, that's going to lower our supply, right? Just like before we're gonna have a lower supply here, because there's not as much available. Our original equilibrium here, our new equilibrium here, and that's going to affect our rate and quantity. So rate one, quantity 1. And we would have this higher interest rate because there's a lower supply and less quantity available. Right? The quantity exchange would be less at this higher interest rate. So in the case of a surplus, well, that would increase our savings, right? That would increase the available savings and increase the supply in this case. So just like we're used to, we find our equilibrium rate, our equilibrium quantity and then how it changed. So notice when there's more savings available, The supply went up, the rate went down and the quantity went up there. Let me get out of the way. So, you see the whole graph. Cool. So that's exactly what happens in, in the other sense. So basically in the first graph, we're talking about the private savings of the households and these graphs, we're talking about the public savings of the government. Cool. So that's about it. Those are all the things that will shift the supply curve is things that will shift our supply, our our private savings and our public savings. Alright, that's about it here, let's go ahead and move on to the next video