THE MARKET FOR LOANABLE FUNDS

When we first analyzed the role of the financial system in Chapter 26, we made the simplifying assumption that the financial system consists of only one market, called the market for loan able funds. All savers go to this market to deposit their saving, and all borrowers go to this market to get their loans. In this market, there is one interest rate, which is both the return to saving and the cost of borrowing. To understand the market for loan able funds in an open economy, the place to start is the identity discussed in the preceding chapter: