04:47
Faizan
Acting as a deficit and a surplus at the same time
To act as a deficit unit and a surplus unit at the same time, one would have to provide funds to one or several financial markets and at the same time use the financial market to obtain funds.
Examples
I obtain a student loan (deficit unit), which means that I use the financial market to obtain funds for my education and obtain a retail certificate of deposit (surplus unit) to provide funds to the financial market
I obtain a mortgage (deficit unit) by obtaining funds from a financial market to buy a house and I purchase a bond (surplus unit) and with that provide the financial market with funds.
I obtain a car loan (deficit unit) to finance a car that I purchase and I open a money market savings account and provide the financial market with my funds.
The Loanable Funds Theory
The loanable funds theory states that there is an inverse relationship between the interest rate and the demand for loanable funds. The lower the interest rates are, the more likely people are to borrow funds, which means that the demand increases and the demand curve shifts outward. When the rate increase, the demand for loanable funds decreases, which would cause the demand curve to shift inward.
However, there is a direct relationship between the interest rate and the supply of loanable funds. When the rate increases, the quantity of supplied funds increases as well. However when the rate decreases, the quantity of supplied funds decreases as well.
The market interest rate is determined by the factors that control the supply and demand for funds: When the demand for loanable funds decreases and shifts inward, the rate decreases (the equilibrium is lower). However, with an increase in demand and an outward shift of the demand curve, the equilibrium increases and results in a higher interest rate.
With an increase of quantity supplied, the supply curve shifts outward when the rate decreases or is low. When the quantity supplied decreases, the rate increases.
To act as a deficit unit and a surplus unit at the same time, one would have to provide funds to one or several financial markets and at the same time use the financial market to obtain funds.
Examples
I obtain a student loan (deficit unit), which means that I use the financial market to obtain funds for my education and obtain a retail certificate of deposit (surplus unit) to provide funds to the financial market
I obtain a mortgage (deficit unit) by obtaining funds from a financial market to buy a house and I purchase a bond (surplus unit) and with that provide the financial market with funds.
I obtain a car loan (deficit unit) to finance a car that I purchase and I open a money market savings account and provide the financial market with my funds.
The Loanable Funds Theory
The loanable funds theory states that there is an inverse relationship between the interest rate and the demand for loanable funds. The lower the interest rates are, the more likely people are to borrow funds, which means that the demand increases and the demand curve shifts outward. When the rate increase, the demand for loanable funds decreases, which would cause the demand curve to shift inward.
However, there is a direct relationship between the interest rate and the supply of loanable funds. When the rate increases, the quantity of supplied funds increases as well. However when the rate decreases, the quantity of supplied funds decreases as well.
The market interest rate is determined by the factors that control the supply and demand for funds: When the demand for loanable funds decreases and shifts inward, the rate decreases (the equilibrium is lower). However, with an increase in demand and an outward shift of the demand curve, the equilibrium increases and results in a higher interest rate.
With an increase of quantity supplied, the supply curve shifts outward when the rate decreases or is low. When the quantity supplied decreases, the rate increases.
Posted in: business
