Econ 141 - Ch.41
Notes on Chapter 4
Loanable Funds and the Real Interest Rate
Potential GDP depends on the quantity of productive resources. Thegrowth rate of PGDP depends on how rapidly the resources grow.
One of the major resources that is important to grow is the economy'scapital stock.
The capital stock includes business capital as well as inventories.
is measured by its total physical quantityand quality of plants, machines, equipments, buildings, inventories of rawmaterials and semi-finished goods, highways, schools, etc.
In addition to the privately owned capital stock resulting from privateinvestment (business investment plus investment in new homes andadditions to inventories), we also have publicly owned capital stock in theform of
social infrastructure capital
(highways, dams, schools).
Social infrastructure capital is primarily created by governmentinvestment.
The capital stock is determined by investment decisions.
The funds that finance investment are obtained in the market for loanablefunds.
market for loanable funds
is the market in which households, firms,governments, banks, and other financial institutions borrow and lend.
To understand the investment and the saving decisions in the loanablefunds market, we have to understand the meaning of the interest rate anddistinguish between nominal interest rate and real interest rate. Classical