A Consumer Spending Boom
Households spend more and save less at every real interest rate, so the supply of loanable funds shifts left and the real interest rate climbs.
A Consumer Spending Boom
Loanable Funds MarketHouseholds spend more and save less at every real interest rate, so the supply of loanable funds shifts left and the real interest rate climbs.
Equilibrium at Quantity of Loanable Funds 73, Real Interest Rate (%) 5
Start at Equilibrium
The market begins in equilibrium with the real interest rate on the vertical axis and the quantity of loanable funds on the horizontal axis. Every dollar of household disposable income is either spent or saved, and the saved share is what flows into this market as supply.
Now try it yourself: shift the curves in a graded FRQ drill, or open this graph in the free sandbox.
Students predict what happens before the graph moves. No accounts, nothing graded.
A Consumer Spending Boom, step by step
- 1
Start at Equilibrium
The market begins in equilibrium with the real interest rate on the vertical axis and the quantity of loanable funds on the horizontal axis. Every dollar of household disposable income is either spent or saved, and the saved share is what flows into this market as supply.
- 2
Households Save Less at Every Rate
Feeling richer and more secure, households shift toward spending and away from saving. Less income reaches banks, bond markets, and retirement accounts, so fewer funds are available to lend at any given real interest rate. The supply of loanable funds shifts left. Firms have not changed their view of which projects are worth doing, so demand stays where it is.
- 3
The Real Interest Rate Rises
A smaller pool of saving faces unchanged borrowing plans, so the equilibrium slides up along the demand curve. The real interest rate rises and the equilibrium quantity of funds borrowed and lent falls. Rate up and quantity down together is the fingerprint of a leftward supply shift, the opposite pattern from a demand shock.
- 4
Investment Gets Squeezed
At the higher real interest rate, firms drop the projects whose expected returns no longer beat the cost of borrowing. That is a movement up along the demand curve, not a leftward shift of it. The spending boom feels good this year, but the capital that goes unbuilt is what would have raised output and wages later on.
Where it ends up
When households save less at every real interest rate, the supply of loanable funds shifts left, raising the real interest rate and reducing investment.
Now draw it yourself
Same graph, graded on whether you move the right curve and leave the rest alone.
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