From purely economic theory standpoint, why are interest rates so low when corporate profits are...

Question:

From purely economic theory standpoint, why are interest rates so low when corporate profits are so high?

Loanable Funds Market:

Loanable funds market is the market for borrowing and lenders. The borrowers demand loanable funds in this market, while the savers supply loanable funds. The forces of demand and supply determine the interest rate in equilibrium.

Answer and Explanation:

Interest rate is low precisely because corporate profit is high. Firms need capital to invest in profitable investments, and funds can come internally through retained earnings, or externally through borrowing. When corporate profit is high, firms have abundant internal capital, and thus the need to borrow externally is low. As a result, the demand for loanable funds is low. Low demand implies that the price of loanbale fund, i.e., interest rate, will be low.


Learn more about this topic:

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Loanable Funds: Definition & Theory

from Introduction to Business: Homework Help Resource

Chapter 25 / Lesson 29
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