Loanable Funds Market

All income people choose to save and lend out Savings (bank deposit or buying a bond from a firm) investment (ie. home mortgage, factories, machinery) Interest. High interest makes borring more expensive, so quantity / supply decreases. Saving makes it more attractive, so demand / quantity goes up as interest falls until equilibrium is achieved.

Nominal interest rate (monetary return to saving and monetary cost to borrowing) adjusted for inflation

Individual Retirement Accounts that shelter some savings from taxes Investment incentives/ tax credit to borrow and invest in new capital.

Private Savings + Public Saving (gov't budget) At a budget deficit, national savings decrease, crowding out private borrowers. Less loans are available and interest rises, discouraging borrowing and investing.

War. Gov't spending: sending troops, military equipment. Taxes: rise more slowly than government spending Financing smooths out tax rates and future generations help pay it off, ie. Reagonomics (build up defense for the Cold War but also cut taxes. Raised revenue by selling bonds). Clinton and Republicans in Congress made budget surplus, but Bush made wars and the budget deficit again

1) We're not in a crisis, because debt is relative. We can manage $3.8 billion interest because we have a $14 trillion GDP and $3 trillion budget. It is OK to have a debt for the big problems- bail out industries, protect homeland. We're still the biggest economy in the world. 2-3% economy growth, cheap homes, same taxes, high living standard. 2) There's a finite money in economyEvvery dolar borrowed to spend, 1 less available for the private sector to borrow. C decreases, I decreases. Crowding Out Effect.

Open Market OperationsReserve RequirementsDiscount Rate

Buy and sell government bonds to change the money supply Now it is the most common tool to use before a crisis (used to be Discount Rate)

Regulating the minimum amount of reserves that banks must hold against deposits. If you raise reserve requirements, there is less loans, lower the money multiplier, lower money supply. If it is 5%... With $100 deposit, $95 can be lent out but $5 must remain in bank as cash at all time. So consumer can always cash a check or make a withdrawal.

The interest rate on the loan that the Fed makes to banks (too many loans or higher level of withdrawals). Higher discount rate discourages banks from borrowing. This helps financial institutions in trouble, ie. lend to financial institutions with defaulted home loans To grow the economy, lower Discount Rate (people borrow more and then spend more). C and I go up. This is the short term interest rates bet banks (less than discount rate)

1) Can't control how much people save/ hold as deposits 2) can't control how much banks lend out

1) Regulate the banking system so the rich and poor can access. more difficult to do:2) control/manage inflation. Figure out- is 3% too much? Control money supply 3) Grow the economy (create jobs, more spending-> economic growth) C goes up.

The World Bank gives money. IMF lends money

The more developed an economy, the easier it is to borrow The more developed an economy, the more sensitive it is to interest rate. Elasticity.

Shrinking the government: with less government spending, lower tax rates (or both) *Raising Interest rates to make money more expensive to borrow. People will spend less.