Question

Keynesian economists “tweaked” the theory of the loanable funds market--they assumed that real GDP was less than potential real GDP, and that real GDP fluctuated in response to changes in aggregate demand. Use the loanable funds market and explain how adjustments to real GDP, following an autonomous increase in savings, equilibrate the loanable funds market. Recall, that the paradox of thrift is relevant in this case.

Answer 1

The Financial needs of Business Traders, Household People, Service sector employees are satisfied through proper disbursement of loanable funds by regularizing it in a proper channel of execution. Such smooth execution of channelizing loanbale funds are determined by income earned by the people, expected future income, Savings for future investments.

The Real GDP refers to the Common consumption Investment and spending of the Government in relation to Government Budget and also the Import and Export Rate. It also influenced by means of Inflation and Deflation. According to Keynesian idea of Theory of the loanable funds marekt, The value of the Real GDP fluctuates according to the aggregate Demand. We can discusss the factors of the situation by the following reasons.

The Demand for the Loanabe funds will increase the increase in the Rate fof interest will substantially suggests the positive sloping of the Supply for the Loanable Funds. So We can evidently proove that Demand for the Loanable Funds have direct proportion of Supply for the Loanble Funds. Total amount of Credit determines the Propensity to Save. So Heavy amount of Credit may face disequilibrium in which increase the Interest Rate for the Loanable Fund. If the Federal Government grants some subsidies to the Banking Institution in order to reduce the interest rate levied for the borrowed money, then automatically the rate of Private Savings will increase at the optimum level.

The Paradox of Thrift has an basic assumption of too much savings will also pose the threat to the Economy. In the Recession time, the activity of more savings are possible. But when the economy in the normal stage, Savings should be in the Automonous state in which Total income should equal to Total Output. The income will direct proportion on Savings. In Microeconomic level the Paradox thrift is good adoptable one for the individual. But in the Macroeconomic level, More savings will lead to less consumption. This in turn leads to less output production and less employment opportunities. So the autonomous increase in the savings leads to equilibrium level of Loanable Funds in the Optimum Level. Moderate level of Savings gains momentum in the achievement of increase in the rate of providing Loanable Funds.