Answer to Question #170950 in Finance for Smeedy Banda

Question

What is the impact of factors affecting loanable fund?

Answer 1

• The fall in Public Saving will cause National Saving to fall, the supply of loanable funds will decrease and interest rates will go up. The higher interest rates will discourage private borrowing and tend to crowd out some private capital investment.
• Effects of an expected increase in the inflation rate on the market for loanable funds will decreases the demand for loanable funds thereby increasing the nominal interest rate.
• If the passage of an investment tax credit encouraged firms to invest more, the demand for loanable funds would increase. As a result, the equilibrium interest rate would rise, and the higher interest rate would stimulate saving. An investment tax credit increases the demand for loanable funds.
• Monetary policy affects interest rates and the available quantity of loanable funds, which in turn affects several components of aggregate demand. Tight or contractionary monetary policy that leads to higher interest rates and a reduced quantity of loanable funds will reduce two components of aggregate demand.