Loanable Funds Market vs Money Market
Loanable Funds Market and Money Market are related concepts in AP Economics that students often mix up. In short: loanable funds market is the market where savers supply funds and borrowers demand funds for investment, determining the real interest rate. Meanwhile, money market is the money market is the model in which the supply of and demand for money determine the nominal interest rate. Here is how they compare side by side.
The market where savers supply funds and borrowers demand funds for investment, determining the real interest rate.
The supply comes from private and public saving, while demand comes from borrowers seeking loans for investment. The equilibrium real interest rate balances saving and investment. Shifts in either curve change the interest rate and the quantity of loanable funds.
The money market is the model in which the supply of and demand for money determine the nominal interest rate.
The money supply is vertical because the central bank sets it, and money demand slopes downward. Their intersection sets the equilibrium nominal interest rate. Expansionary monetary policy shifts money supply right, lowering interest rates.
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