Question

Indicate the sources of demand for loanable funds, and discuss the factors that affect the demand for loanable funds.

Answer 1

Sources of demand for loanable funds:

The demand for loanable funds generally comes from all sectors of the economy. Businesses generally borrow to finance their current operations & also to buy their plant & equipment. Farmers also borrow in order to meet their short & long term needs. Institutions like hospitals & schools borrow to finance for their new buildings & equipment. Individuals borrow on a long term basis for buying home & also borrow on short term basis to purchase any durable goods or to meet any emergency situations. Government organizations borrow for the purpose of financing public buildings, to bridge the gap between expense & tax receipts & also to meet budget deficits.

The interest rates have an impact on the demand for various types of credits offered.

The factors of demand for loanable funds are productivity of capital and investor confidence. An increase in either of these two factors would shift the demand curve for loanable funds rightward. An increase in government borrowing (by governments running larger deficits) would also be an acceptable answer.