5 Steps to a 5 AP Macroeconomics 2019

98 ❯ Step 4. Review the Knowledge You Need to Score High

investment could increase or decrease, but at that new level, would once again

be constant at any value of GDP.

Market for Loanable Funds

It is useful to see the relationship between saving and investment by looking at the market

for loanable funds. When savers place their money in banks or buy bonds, those funds are

available to be borrowed by firms for private investment.

Demand for Loanable Funds

The inverse relationship between investment and the real interest rate is fairly straightfor-

ward. As the real interest rate falls, borrowing becomes less costly, and large investment pro-

jects become more attractive to firms. This investment demand curve can also be thought of

as a demand for loanable funds, and this demand is the result of the borrowing by private

firms and the government.

Supply of Loanable Funds

The supply of loanable funds comes from saving on the part of households, both domes-

tic and foreign. If disposable income is greater than consumption, this private saving exists,

and is positively related to the real interest rate.

$ Investment (I)

%

Investment

Demand

5

20

Figure 8.5

Figure 8.6

KEY IDEA

$ GDP = DI

$ Investment (I)

$20 I