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Main content
Current time:0:00Total duration:7:32
AP.MACRO:
MKT‑4 (EU)
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MKT‑4.A (LO)
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MKT‑4.A.1 (EK)
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MKT‑4.A.2 (EK)
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MKT‑4.A.3 (EK)
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MKT‑4.C (LO)
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MKT‑4.C.1 (EK)
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MKT‑4.D (LO)
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MKT‑4.D.1 (EK)
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MKT‑4.E (LO)
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MKT‑4.E.1 (EK)
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MKT‑4.E.2 (EK)

Video transcript

we are used to thinking about markets for goods and services and demand and supply of goods and services and what we're going to do in this video is broaden our sense of what a market could be for by thinking about the market for loanable funds now this might seem like a very technical term loanable funds but it literally just means funds that people are supplying to be lent out to other people and funds that people are demanding that they want to borrow and so one way to think about this market the suppliers in the loanable funds market these are the savers so when you go and save some money maybe at a bank that bank will then lend that money to someone else and because the bank is getting interest from that person they can also afford to pay you some interest so you get a return it doesn't always have to be through a bank but that tends to be typical it'll go through some type of intermediary similarly who are the demanders or where is the demand coming from I don't know if demanders is a real word but I'll just write it down so where is the demand coming from well that is coming from the borrowers who are interest in maybe making an investment maybe some type of business opportunity is available to them and as I mentioned this isn't a market where the suppliers and the demanders or the savers and the borrowers necessarily directly interact with each other every now and then you might get a loan from your sister-in-law or from from your parents but oftentimes usually it's going through some type of institution some type of financial institution usually banks where the savers put their money in a bank hoping not just for safekeeping but really to get a return on their money in order to provide a return to those savers the bank will then lend it out to borrowers and charge interest to them and to appreciate this and the way that we've looked at markets before I can set up two axes and in any market that we've looked at before the horizontal axis this is the quantity and so here we're talking about the quantity of loanable funds loanable funds and then on the vertical axis we normally think about the price for the good or service when we're dealing with loanable funds the price is the interest rate and if we want to know the real price we should be talking about the real interest rate real interest rate and so let's think about each of these scenarios let's think about the savers who are really the suppliers in the loanable funds market when real interest rates are low or for real interest rates are low they don't want to really supply a lot of quantity they're not getting not a lot of motivation to be a supplier to save in that situation but if real interest rates are high well then they might say yeah I'm gonna I'm gonna I'm more likely to save and I want to leave make my funds available for loaning out to other people because I get this a great interest rate especially it's a real interest rate so we could view it as something like this this we could call our supply of loanable funds and you could imagine what the demand curve for loanable funds looks like when real interest rates are high people say hey you know there aren't that many business opportunities that could justify borrowing at that high of a rate so there wouldn't be much quantity that is demanded but is the real interest rate sure if the real interest rates are lower as they get lower then the quantity demanded of loanable funds will be higher so this is our demand for loanable funds and like we've seen in the past you are going to have an equilibrium quantity and price where price in this situation is your real interest rate and so that's going to happen where these intersect this is our equilibrium quantity and this is our equilibrium real interest rate now let's think about what would happen if one or both of these curves were to shift somehow and there's a couple of ways let's start with the demand for loanable funds there's a couple of ways that the demand for loanable funds curve could shift maybe all of a sudden people see new business opportunities asteroid mining is becoming a thing and so people want to borrow money to get robots and send them out into space so they can mine asteroids for platinum or something well what would happen pause this video and think about that well then at any given real interest rate there's going to be a higher quantity demanded in that situation our demand for loanable funds would shift to the right it would look something like this so this is demand for loanable funds I'll call it sub 2 sometimes you'll see something like a prime there but I'll call it sub 2 so it has shifted to the right because of new business opportunities another common reason why that might shift to the right is if maybe the government is doing a lot more borrowing remember this is an aggregate market here so the government when it borrows money to fuel its spending that also it has to go into the loanable funds market and so increased government borrowing would also shift this to the right and if the opposite happened if people thought there are fewer business opportunities or if the government started to borrow less well that would shift things to the left but let's just think about what would happen if our what is the current equilibrium interest rate if that just stayed where'd what is well then you're going to have a shortage of loanable funds where the suppliers would be willing to supply this quantity while the borrowers are going to want this quantity here at that real interest rate and so what you're going to have happen is you're going to get to a new equilibrium point the real interest rate is going to go up to this point let's call that our new equilibrium real interest rate and our quantity is going to go up as well so q1 in order to get in order to be convinced more suppliers to part what there might not part with their money or at least make their money available for lending well the interest rates going to have to go up and we get to that point right there similarly you could have shifts in the supply of loanable funds let's say for example the savings rate changes for some reason there's a big marketing campaign and from the government or in education or in schools to say hey we need to save more for a rainy day you need to save more for our retirement well then the supply of loanable funds if everyone saves more at any given real interest rate well then the supply for loanable funds curve could shift to the right and if the opposite happened of course it would shift to the left supply of loanable funds - and then what would happen well if we were at this point right over here all of a sudden we are in a situation where there's a surplus of loanable funds at this interest rate people are willing to supply way more loanable funds than people are demanding so then the price of the loanable funds which is the real interest rate will go down it will go down to this new equilibrium point and so here this we could call this r sub 3 would be our new real interest rate equilibrium real interest rate and this would be our new equilibrium quantity actually we call this R sub 2 right over here so I will leave you there the big takeaway is is that loanable funds kind of operate the way the market for most anything would with the difference being that the price is no longer just a dollar amount it is an interest rate and since we want to factor out inflation it is a real interest rate
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