Question

1. Explain why households supply loanable funds to the market.

2. What are the conditions for a commodity to serve as money in a modern economy?

Answer 1

1. In capital markets the demand and supply for different types of capital takes place. Companies are typically capital demanders in these capital markets whereas households are typically capital suppliers. Households indirectly supply capital goods by choosing to save a portion of their income and loan those savings to banks. Banks, in turn, are lending household savings to firms using these funds to buy capital goods. The term loanable funds is used to identify the funds that can be lent. Loanable funds consist of savings from the households and/or bank loans. Since investments in new capital goods are often made with loanable funds, the demand and supply of capital is also addressed in terms of loanable funds demand and supply.

2. Money solves the problems which the barter system produces. First, money serves as a medium of trade, meaning that money functions as an intermediary between buyer and seller. Instead of trading accounting services for shoes, the accountant is now trading money for accounting services. It then uses the money to purchase shoes. Money must be generally accepted as a means of payment for goods, labor, and financial resources in the markets to act as a medium of exchange.

In various societies, money has taken on a wide variety of ways. The money was used for gold , silver, cowrie shells, tobacco, and even cocoa beans. While these things are used as commodity currency, they also have a use-value as other than currency. For example, gold has been used as money over the ages but it is not used today as money but is valued for its other attributes. Gold is a fine electricity conductor, used in the electronics and aerospace industries. Gold is also used for the manufacture of energy-efficient reflective glass for skyscrapers, and is also used in the medical industry.