Daily Review -- Loanable Funds Basics

When savings increases, the supply of loanable funds increases, the real interest rate decreases.  This shown first through the Circular Flow model then with supply and demand analysis.

In Figure 1, households save more when the budge is balanced.  I assumed no transfer payments. When the supply of savings increases, the price of borrowing becomes cheaper as shown in Figure 2, below.







Starting at point 1 in the supply and demand, what would happen if the government borrowed loanable funds to finance construction of a new school?  My answer is that the supply curve would shift to the left and the real interest rate would rise.

It is my proposition that the supply of loanable funds is the sum of private and public savings. Thus  by using logic one can predict the movement of interest rate by simple know if the supply increases or decreases.