19.1 Supply and Demand for Loanable Funds and for Foreign-Currency Exchange

19.1 a. The Market of Loanable Funds

The loanable funds market is the market where those who have excess funds can supply it to those who need funds for business opportunities [1].

The supply for loanable funds come from national savings and demand from domestic investment and net capital outflow. Saving = Domestic Investment + Net Capital Outflow [2].

A higher real interest rate encourages people to save and thus raises the quantity of loanable funds supplied but makes borrowing to finance capital projects more costly, discouraging investment and reducing the quantity of loanable funds demanded [2].

Example: Stock exchanges, investment banks, mutual funds firms and commercial banks [1]

^{The Market of Loanable Funds [3]}

19.1 b. The Market for Foreign-Currency Exchange

The foreign exchange market is the market in which participants are able to buy, sell, exchange and speculate on currencies [4].

Example: When the U.S. real exchange rate appreciates, U.S. goods become more expensive relative to foreign goods, lowering U.S. exports and raising imports. Thus, an increase in the real exchange rate will reduce the quantity of dollars demanded [2].

^{Foreign Exchange Market [5]}