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September 11, 2007
Loanable Funds
Our goal today is to motivate a diagram showing the supply and demand for loanable funds. Loanable funds is an aggregate of all financial securities except money.
The two goods - two prices diagram explains why people save if the two goods are taken to be present and future consumption.
The trick is understanding how the interest rate is a key element of the budget constraint.
The story behind the demand for loanable funds is that borrowing to finance physical investment depends on the interest rate.
This diagram shows both monetary and fiscal policy.
Lets have a closer look at fiscal policy. Could this have long run effects?
Posted by bparke at September 11, 2007 09:37 PM