5 Questions
What is one factor that affects the supply of loanable funds from households?
Immediate spending needs, such as near-term educational or medical expenditures.
How do higher interest rates affect the supply of funds from the U.S. business sector?
Higher interest rates result in higher supplies of funds from the U.S. business sector, as businesses are more likely to invest their excess cash in financial assets.
Why do some governments supply loanable funds to financial markets?
Some governments, such as municipalities, temporarily generate more cash inflows than they have budgeted to spend, and these funds can be loaned out to financial market fund users until needed.
What motivates foreign investors to increase their supply of funds to U.S. financial markets?
Foreign investors increase their supply of funds to U.S. financial markets when interest rates are higher on U.S. financial securities than they are on comparable securities in their home countries.
What happened to the investment decisions of foreign investors during the recent financial crisis?
During the recent financial crisis, investors worldwide, searching for a safe haven for their funds, invested huge amounts of funds in U.S. Treasury securities.
Study Notes
Supply of Loanable Funds
- The supply of loanable funds increases as interest rates rise, as shown in Figure 2-2.
- The household sector is the largest supplier of loanable funds in the United States, providing $57.70 trillion in 2013.
- Households supply funds when they have excess income or want to reallocate their asset portfolio holdings.
- As total wealth of a consumer increases, the total supply of loanable funds from that consumer also increases.
- Households determine their supply of loanable funds based on interest rates, total wealth, risk of securities investments, and immediate spending needs.
Business Sector Supply of Loanable Funds
- The business sector supplied 19.50trillionfromnonfinancialbusinessand19.50 trillion from nonfinancial business and 19.50trillionfromnonfinancialbusinessand48.97 trillion from financial business in 2013.
- Higher interest rates result in higher supplies of funds from the business sector, which often has excess cash to invest in financial assets.
- The business sector's supply of funds is affected by interest rates, expected risk on financial securities, and their businesses' future investment needs.
Government Supply of Loanable Funds
- Governments supplied $19.57 trillion in 2013, including municipalities that generate more cash inflows than they have budgeted to spend.
- These funds can be loaned out to financial market fund users until needed.
Foreign Investors' Supply of Loanable Funds
- Foreign investors supplied $20.09 trillion to the U.S. financial markets in 2013.
- When interest rates are higher on U.S. financial securities than in their home countries, foreign investors increase their supply of funds to U.S. markets.
- Foreign investors assess the interest rate offered, total wealth, risk on the security, and their future expenditure needs when making investment decisions.
- Foreign investors alter their investment decisions as financial conditions in their home countries change relative to the U.S. economy and the exchange rate of their country's currency changes vis-à-vis the U.S. dollar.
Learn about the supply of loanable funds, how it increases with rising interest rates, and the role of households in supplying funds in the economy.
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