Thus the demand for loanable funds is downward-sloping, like the demand for virtually everything else, as shown in Figure 13.3 "The Demand and Supply of Loanable Funds" The lower the interest rate, the more capital firms will demand The more capital that firms demand, the greater the funding that is required to finance it The Supply of Loanable Funds Lenders are consumers or firms that decide that they are willing to forgo some current use of their funds in order to have more available in the future Lenders supply funds to the loanable funds market In general, higher interest rates make the lending option more attractive For consumers, however, the decision is a bit more complicated than it is for firms In examining consumption choices across time, economists think of consumers as having an expected stream of income over their lifetimes It is that expected income that defines their consumption possibilities The problem for consumers is to determine when to consume this income They can spend less of their projected income now and thus have more available in the future Alternatively, they can boost their current spending by borrowing against their future income Saving is income not spent on consumption (We shall ignore taxes in this analysis.) Dissaving occurs when consumption exceeds income during a period Dissaving means that the individual’s saving is negative Dissaving can be financed either by borrowing or by using past savings Many people, for example, save in preparation for retirement and then dissave during their retirement years Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 700