Step 27: Rated stuff right here

Federal Fund

• opposite of bank reserves & money supply

Prime Rate

• interest rate that is given to a bank's most credit worthy customers

Loanable Funds Market

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

Change in Demand for Loanable Funds

• demand for loanable funds equals more borrowing 
• supplying bonds
• more borrowing = more demand for LF ( → )
• less borrowing = less demand for LF ( ← )
• i.e.
• government deficit spending = more borrowing = more LF
• less investment demand = less borrowing = less demand LF

Change in Supply of Loanable Funds

• supply of LF = saving
• demand for bonds
• more saving = more supply of LF ( → )
• less saving = less supply of LF ( ← )
• i.e.
• government budget surplus = more saving = more supply of LF ( SLF → r % ↓ )
• decrease in consumers MPS = less savings = less supply LF ( SLF ← r % ↑ )
• Loanable Funds Market determines real interest rate
• ∆ in real interest will affect Ig
• when the government does fiscal policy, it will affect the LF Market
• ∆ in savings/borrowing creates a ∆ in → r % ∆
• LF Market relates savings and borrowing