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Principles of Macroeconomics


4. Loanable Funds Market and Production Possibilities


Here we learn about what determines savings decisions (the supply of loanable funds) and investment decisions (the demand for loanable funds). Investment decisions are the decisions of firms to build or purchase capital equipment, i.e. manufactured goods that are used in the production of other goods. The implications for the loanable funds market concern short-run and long-run economic activity. In the short-run, less investment in equilibrium leads to lower demand for final goods and services. In the long-run, less investment in the present leads to an otherwise lower capital stock in the future, which limits production possibilities.


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Saving is Equal to Investment

In this Pencast, we show mathematically, that the level of saving in the macroeconomy is equal to the level of investment. Saving is equal to the sum of saving decisions by consumers, saving by the government (can be negative, if the government runs budget deficits), and saving by the rest of the world (i.e. when on average people borrow from the rest of the world to finance import purchases above and beyond revenue from export sales). Investment is primarily firm's purchases of capital goods. [Play Pencast]


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Equilibrium in Loanable Funds Market

Here we demonstrate how we graphically model equilibrium in the loanable funds market. The graphical model will be useful to analyze what happens to interest rates, saving, and investment, when macroeconomic shocks influence the supply or demand for loanable funds. [Play Pencast]


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Shifts in Investment Demand

In this Pencast we discuss factors that can shift investment demand decisions, and use the graphical model to determine the equilibrium effects on the interest rate and levels of investment and saving. [Play Pencast]


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Shifts in Saving Supply - Part 1

In this Pencast we discuss factors that can shift consumers' saving supply decisions, and use the graphical model to determine the equilibrium effects on the interest rate and levels of investment and saving. [Play Pencast]


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Shifts in Saving Supply - Part 2

In this Pencast we discuss political and international factors that can shift saving supply. We use the graphical model to determine the equilibrium effects on the interest rate and levels of investment and saving. [Play Pencast]


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Productivity Curve

The productivity curve illustrates the long-run relationship between the level of per-worker output of goods and services, and the average level of capital stock per worker that available. As more capital is available for worker, the average level of production can be higher. In the Pencast, we go into more detail on how production rises or falls, should capital stock rise or fall. Long-run levels of capital stock rises or falls when current equilibrium levels of investment rise or fall, respectively. Therefore, among other things, this model illustrates the long-run consequences of the loanable funds market on production possibilities. [Play Pencast]


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Shifts in the Productivity Curve

Other things besides the level of available capital stock can influence worker productivity. This Pencast discusses some of these. We demonstrate how we model such changes, and use the model to illustrate the impact on long-run output per worker. [Play Pencast]


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