Question

In: Economics

Should go to the following link and post their comments.

 

Should go to the following link and post their comments. https://www.khanacademy.org/economics-finance-domain/macroeconomics/income-and-expenditure-topic/is-lm-model-tutorial/v/loanable-funds-interpretation-of-is-curve

Solutions

Expert Solution

I am hoping that you would want an answer with regards to the IS model. Now when a bank runs out of loanable funds you really have to know the reason why this happened. It could be because the bank has lent out all of it's money in which case it will borrow from other Banks to lend out the money at a rate called the bank rate. Now since bank rate is always lower than the prevailing interest rate the bank still comes on top of such a transaction.

A bank can also run out of loanable funds because all the depositers have withdrawn their money from the banks. This is a classic run for the money case which happened during the great depression as well in response to which President Hoover had to take emergency measures. Such a case is really bad for the economy.

Now if most of the banks are running low on loanable funds because of excess demand for such than in such a case interest rates will increase.


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