UVA ECON 2020 - 9-14-2012Handout (8 pages)

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9-14-2012Handout



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9-14-2012Handout

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Pages:
8
School:
University Of Virginia
Course:
Econ 2020 - Principles of Economics: Macroeconomics

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Market for Loanable Funds Financial Instruments Savings and Investment Elias Yannopoulos September 14 2012 Elias Yannopoulos Savings and Investment Market for Loanable Funds Financial Instruments Concepts Capital goods goods used to produce other goods and services Ex Factories machines that build cars Investment Spending on capital goods Spending to increase future production Without investment there is no future production Remember depreciation Every dollar borrowed requires a dollar saved Elias Yannopoulos Savings and Investment Market for Loanable Funds Financial Instruments Terminology Market for Loanable Funds has different terminology but functions similar to other markets Good Savings loans Price Interest rate Buyers Demanders Borrowers Sellers suppliers Savers lenders Elias Yannopoulos Savings and Investment Market for Loanable Funds Financial Instruments Supply of Loanable Funds Interest rate Reward for saving Remember Law of Supply P Qs For loanable funds interest rate savings Time Preference Goods and services are more valuable the sooner they are delivered Time preference means that individuals prefer money today to money tomorrow therefore lenders want compensation In general people prefer smooth consumption patterns Borrow early in life and save while working for retirement Elias Yannopoulos Savings and Investment Market for Loanable Funds Financial Instruments Demand for Loanable Funds Interest rate Cost of Borrowing Firms borrow expected return on investment cost of a loan Remember Law of Demand P Qd For loanable funds interest rate investment When capital is more productive loan demand increases at all interest rates New technology greater returns to investment increase demand for loans Investor confidence A firm s expectations about future economic activity Equilibrium graph Savings Investment Elias Yannopoulos Savings and Investment Market for Loanable Funds Financial Instruments Bonds Bonds loan contracts function like IOUs Three key pieces of



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