Economics
Supply of Loanable Funds
The supply of loanable funds refers to the total amount of funds available for lending in a financial market. It is influenced by factors such as savings, investment, and government policies. An increase in the supply of loanable funds typically leads to lower interest rates, while a decrease in supply results in higher interest rates.
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6 Key excerpts on "Supply of Loanable Funds"
- Michael Brandl(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
To understand how the loanable funds market works, let’s think about each side of the market in turn. 3-4a The Supply of Loanable Funds Savers provide funds for our pool of loanable funds. These savers, or surplus units, are entities who have an optimal level of expenditure in the current period that is less than their current income. These savers or surplus units include the following. Households When a household’s after-tax income is greater than their utility-maximizing consumption level, they bring this “surplus” income to the financial markets as savings. In terms of loanable funds, they add this surplus income, or loanable funds, to the pool of loanable funds. Firms When a firm has a level of income in the current period that is greater than its profit-maximizing level of expenditures, it too brings this “surplus” income to the financial markets as savings. In this case, firms also may contribute to the pool of loanable funds. Governments When a government runs a budget surplus it is collecting more in tax revenue than it is spending. The government entity then brings this “surplus” tax revenue to the financial mar-kets in order to lend it to others. Governments—be they national, state, or local governments or government agencies—may also contribute to the pool of loanable funds. Rest of the World As our financial markets become more globally intertwined, we see people, firms, and governments from around the world bringing funds to our financial markets. Thus, the rest of the world can contribute to the pool of loanable funds. Pool of loanable funds Savers: suppliers of loanable funds Borrowers: demanders of loanable funds $ $ Figure 3-10 Loanable Funds Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
- Michael Brandl(Author)
- 2020(Publication Date)
- Cengage Learning EMEA(Publisher)
All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 47 CHAPTER 3 Bonds and Loanable Funds To determine the impact of these changes in the Supply of Loanable Funds, we need to inves-tigate the other side of the market, or the demand for loanable funds. 3-4b The Demand for Loanable Funds Borrowers in financial markets take funds from our pool of loanable funds. These borrowers, or deficit units, are entities who have an optimal level of expenditure in the current period that is greater than their current income. These borrowers or deficit units include the following. Households When a household’s utility-maximizing level of consumption is greater than its current after-tax income, it might borrow the difference from the financial market. Or, it might withdraw savings it has from previous time periods. In terms of loanable funds, it is withdrawing funds from the pool of loanable funds. Firms When a firm has a profit-maximizing level of expenditures that is greater than its income in the current period, it too must borrow to make up the difference. In this case, firms borrow from the pool of loanable funds. Governments When a government runs a budget deficit, it is spending more than what it is collecting in tax revenues. To make up this difference, the government has to borrow funds in the financial markets or borrow money from the pool of loanable funds. Governments—be they national, state, or local governments or government agencies—may withdraw or borrow funds from the pool of loanable funds.
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- C. Read(Author)
- 2009(Publication Date)
- Palgrave Macmillan(Publisher)
Borrowing to produce Adding to the demand for loanable funds are the capital needs of commerce. Production of goods and services requires investment in factories, supply and distribution chains, inventories, and retail outlets. These investments in productive capacity are investments in the economists’ sense, but not investments in the financial sense. While households usually refer to investment as putting money into financial markets for speculative purposes, economists reserve the term for spending used to expand the pro- ductive capacity of the economy, through new factories, equipment, homes, and the like. Interest rate r Demand for loanable funds Borrowing S Figure 3.4 Demand for Loanable Funds The Demand Side 27 Each such production activity can be ranked based on its investment needs and its expected returns. This comparison of interest rates to the efficiency of capital investments is sometimes labeled the Marginal Efficiency of Capital model. If expected returns exceed investment needs and the borrowing costs to cover interest payments, the activity is profitable. As interest rates increase, fewer activities are profitable, and fewer investments are made. As interest rates decline, more activities are profitable and the demand for loanable funds increases so that producers can take advantage of profitable opportunities. Just as consumers demand fewer loans as the interest rate increases, so do producers. The sum of these two demands represents the domestic private demand for loanable funds from households and firms. The budget deficit There is one additional item that has commanded an increasing share of the demand for loanable funds. The funds required to fuel the budget deficit, mostly through the sale of Treasury bills, notes, and bonds, have become an increasingly important factor in the loanable funds market.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
The interest rate will face economic pressures to creep up toward the equilibrium level. The FRED database publishes some two dozen measures of interest rates, including interest rates on credit cards, automobile loans, personal loans, mortgage loans, and more. You can find these at the FRED website (https://openstax.org/l/FRED_stlouis) . Shifts in Demand and Supply in Financial Markets Those who supply financial capital face two broad decisions: how much to save, and how to divide up their savings among different forms of financial investments. We will discuss each of these in turn. Participants in financial markets must decide when they prefer to consume goods: now or in the future. Economists call this intertemporal decision making because it involves decisions across time. Unlike a decision about what to buy from the grocery store, people make investment or savings decisions across a period of time, sometimes a long period. Most workers save for retirement because their income in the present is greater than their needs, while the opposite will be true once they retire. Thus, they save today and supply financial markets. If their income increases, they save more. If their perceived situation in the future changes, they change the amount of their saving. For example, there is some evidence that Social Security, the program that workers pay into in order to qualify for government checks after retirement, has tended to reduce the quantity of financial capital that workers save. If this is true, Social Security has shifted the supply of financial capital at any interest rate to the left. By contrast, many college students need money today when their income is low (or nonexistent) to pay their college expenses. As a result, they borrow today and demand from financial markets. Once they graduate and become employed, they will pay back the loans.
eBook - PDF- Jeff Madura(Author)
- 2020(Publication Date)
- Cengage Learning EMEA(Publisher)
Chapter 2: Determination of Interest Rates 39 Exhibit 2.14 Framework for Forecasting Interest Rates Forecast of Interest Rates Future Supply of Loanable Funds Future Demand for Loanable Funds Future State of the Economy (Economic Growth, Unemployment, and Inflation) Future Foreign Demand for U.S. Funds Future Household Demand for Funds Future Savings by Households and Others Future Foreign Supply of Loanable Funds in the United States Future Business Demand for Funds Future Government Demand for Funds Future Level of Household Income Household Plans to Borrow Future Plans for Expansion Future Volume of Business Future Government Expenditures Future Level of Household Income Fed’s Future Policies on Money Supply Growth Future State of Foreign Economies and Expectations of Exchange Rate Movements Future Volume of Government Revenues Future State of Foreign Economies and Expectations of Exchange Rate Movements Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 40 Part 1: Overview of the Financial Environment Summary ■ ■ The loanable funds framework shows how the equi- librium interest rate depends on the aggregate sup- ply of available funds and the aggregate demand for funds. As conditions cause the aggregate supply or demand schedules to change, interest rates gravitate toward a new equilibrium. ■ ■ Factors that affect interest rate movements include changes in economic growth, inflation, the bud- get deficit, foreign interest rates, and the money supply.
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
If the interest rate (remember, this measures the “price” in the financial market) is above the equilibrium level, then an excess supply, or a surplus, of financial capital will arise in this market. For example, at an interest rate of 21%, the quantity of funds supplied increases to $750 billion, while the quantity demanded decreases to $480 billion. At this above-equilibrium interest rate, firms are eager to supply loans to credit card borrowers, but relatively few people or businesses wish to borrow. As a result, some credit card firms will lower the interest rates (or other fees) they charge to attract more business. This strategy will push the interest rate down toward the equilibrium level. If the interest rate is below the equilibrium, then excess demand or a shortage of funds occurs in this market. At an interest rate of 13%, the quantity of funds credit card borrowers demand increases to $700 billion, but the quantity credit card firms are willing to supply is only $510 billion. In this situation, credit card firms will perceive that they are overloaded with eager borrowers and conclude that they have an opportunity to raise interest rates or fees. The interest rate will face economic pressures to creep up toward the equilibrium level. The FRED database publishes some two dozen measures of interest rates, including interest rates on credit cards, automobile loans, personal loans, mortgage loans, and more. You can find these at the FRED website (https://openstax.org/l/FRED_stlouis). Shifts in Demand and Supply in Financial Markets Those who supply financial capital face two broad decisions: how much to save, and how to divide up their savings among different forms of financial investments. We will discuss each of these in turn. Participants in financial markets must decide when they prefer to consume goods: now or in the future. 98 4 • Labor and Financial Markets Access for free at openstax.org
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