Savings Head Overseas
The question
A sustained construction boom in neighboring countries offers lenders there far better returns than they have seen in years, and households and financial institutions in Brenmark begin placing a large share of their savings overseas. Assume domestic firms' desired investment at each real interest rate is unchanged. Show the effect of this outflow in Brenmark's loanable funds market. Show the effect on the Loanable Funds Market graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Savings Head Overseas: the worked answer
On the Loanable Funds Market graph, Supply of loanable funds shifts left.
Why Supply of loanable funds shifts left
The supply of loanable funds in Brenmark is the pool of saving available to borrowers inside Brenmark. When savers place funds overseas instead, fewer funds are offered to domestic borrowers at every domestic real interest rate, so the supply of loanable funds shifts to the left. Domestic firms' desired investment is unchanged by assumption, so the demand for loanable funds stays put.
What happens to the equilibrium
The equilibrium real interest rate in Brenmark rises and the equilibrium quantity of loanable funds decreases.
The mistake students make on this one
Students often shift demand right, reasoning that the overseas construction boom needs financing and therefore adds borrowers to the picture. The graph is Brenmark's own market, and the foreign builders borrow in their own market, not this one; what leaves Brenmark is lendable funds, which belongs on the saving side.
On exam day
Identify whose market the graph shows before you move anything. Funds crossing a border cut the lending side in the country they leave at the same time as they add to it in the country they enter.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when Supply of loanable funds shifts left and every other curve on the Loanable Funds Market graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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