AP Macroeconomics / Unit 4: Financial Sector
4.7 The Loanable Funds Market
Notes
The real interest rate is set by the supply of loanable funds (saving) and demand (borrowing for investment).
- Government borrowing increases demand → higher real interest rate.
- More saving increases supply → lower real rate.
Practice
Government runs a deficit and borrows. The real interest rate:
Demand for loanable funds increases.
More household saving shifts loanable funds:
More funds available.
The loanable funds market determines the:
Real rate.
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