Name the determinants of demand for loanable funds, and the determinants of supply of loanable funds; and give a short example for each of the determinants.
Determinants of Loanable Funds:
Loanable funds refer to the amount of money saved in an economy. Important to note, loanable funds are lent to borrowers for investment purposes but not for consumption.
Answer and Explanation:
The demand for loanable funds is determined by various factors which include
- Demand for investments. It refers to the demand for capital or money for building capital goods and inventories, which is a major determinant for the demand for loanable funds. Notably, the high demand for investments translates to an increased demand for loanable funds.
- Hoarding. The desire for people to hold money is a major factor determining the demand for loanable funds. Ideally, folks tend to hold more cash if they believe that they will make better use of hoarded cash in the future. Notably, hoarding is subject to the interest rate; low-interest rates attract increased demand for loanable funds, and the contrary happens.
The factors determining the supply of the funds include
- Availability of savings. It is worth noting that savings are the greatest source of loanable funds. Higher savings by households and firms lead to an increase in the supply of loanable funds.
- Dishoarding. It entails bringing hoarded money to use. The move increases the availability and supply of loanable funds as opposed to hoarding, which lowers the supply.
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from Introduction to Business: Homework Help ResourceChapter 25 / Lesson 29