How does foreign personal investment and expected profitability affect supply of loanable funds?

Question:

How does foreign personal investment and expected profitability affect supply of loanable funds?

Supply of loanable funds:

The factors which can affect the supply of runnable funds include-

1.The rate of savings,

2.The market rate of interest,

3.Level of domestic investment and many more.

As we know that it is associated with the 'National Savings rate', which decide the rate of investment too in a market economy. It is an important part of the determination of the market rate of interest.

Answer and Explanation:

Foreign personal investment

Foreign sector impacts the supply of loanable funds via direct investment or the acquisition of government securities. When foreign citizens increase their investment in a country or their purchase of government securities, then the supply of loanable funds will increase. On the contrary, a reduction in foreign personal investment will reduce the supply of loanable funds.

Expected profitability

The second most effective component is the expected rate of profits regarding the current investments. It also affects the supply of loanable funds.

For instance - an increase in the expected rate of profits will definitely reduce the rate of savings at the current stage; while a decrease in the future income (profit) definitely shifts the supply of loanable funds.


Learn more about this topic:

Loading...
Loanable Funds: Definition & Theory

from Introduction to Business: Homework Help Resource

Chapter 25 / Lesson 29
64K

Related to this Question

Explore our homework questions and answers library