Principles of Macroeconomics / Unit 2 MAC 0134 worked example, 60 to 90 seconds
Loanable Funds: Which Curve Shifts
The idea
Use the same routine as any market, with saving as supply and borrowing as demand. Ask whether the event changes how much people wish to save at each rate, which moves supply, or how much they wish to borrow at each rate, which moves demand. Then read the result: supply right lowers the interest rate and raises the quantity of funds; supply left raises the rate and lowers the quantity; demand right raises both; demand left lowers both.
In practice
Worked example: households decide to save more of their income at every interest rate. That is supply, and it shifts right. The real interest rate falls and the quantity of funds borrowed and lent rises. Second case: firms turn pessimistic and cut planned investment. That is demand, and it shifts left. The rate falls again, but this time the quantity falls too, which is how the two cases are told apart.
Where people slip
Both cases lower the rate, so the rate alone does not identify which curve moved. The quantity does: it rises when supply moves right and falls when demand moves left. Always check both.
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