Graph walkthrough · Macro · Loanable funds market

A saving boom lowers rates

Households decide to save a larger share of their income.

Step 1 of 3 · Before the saving boom

The horizontal axis is the quantity of loanable funds. The vertical axis is the real interest rate. Saving supplies funds, investment demands them. The market is at E₀.

The chain in words

Step 1
Before the saving boom
The horizontal axis is the quantity of loanable funds. The vertical axis is the real interest rate. Saving supplies funds, investment demands them. The market is at E₀.
Step 2
Supply of funds shifts right
More saving means more funds offered to borrowers at every interest rate, so the supply of loanable funds shifts right. At the old rate, savers offer more than borrowers want.
Step 3
The real interest rate falls
Banks and bond markets lower the rate to find borrowers. The lower rate makes more investment projects worthwhile, a movement along demand. The market settles at E₁: a lower real interest rate and more funds lent and invested.

Takeaway. A rise in saving shifts the supply of loanable funds right, lowering the real interest rate and raising investment.

Draw it yourself

This shock: draw the graph The government runs a deficit An investment tax credit Foreign savers lend here

More on the loanable funds market graph

A deficit crowds out investment An investment tax credit Foreign capital flows in A budget surplus lowers rates

Go deeper

Lesson: Limits of Fiscal Policy

The walkthrough shows the chain. The lesson explains why each link holds, with worked examples and practice questions that remember what you get wrong.

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