Demand for Loadable Funds
The demand for loadable funds comes mainly from three fields: (i) investment, (ii) consumption and (iii) hoarding. The bulk of demand for loadable funds comes from business firms which borrow money for purchasing or making new capital goods. including the building up (If inventories. Demand for loadable funds for investment purposes by business firms is the most important constituent of total demand for loadable funds. The price of the loadable funds required to purchase the capital goods i obviously the rate of interest. It will pay businessmen to demand loadable funds up to the point at which the expected net rate of return on the capital goods equal the rate of interest. Businessmen wail] find it profitable to purchase larger amounts of capital good”, hen the rate pf interest (i.e., the price of the loadable declines. Thus, the demand for loan ab e r f ment purposes is interest-elastic and to the right. The demand for loan ab e fu for investment purposes is represented by curve I i The second hig demand for loadable funds from individuals or households who want to borrow for consumption purposes. Individuals or house demand loadable funds when they wish to make purchases in excess of their current incomes and cash resources. Generally, the loans for consumption are demanded or buying durable goods like automobiles, refrigerators, radios, television sets, etc. Lower rates of interest will encourage some increase in consumer borrowing. Demand for loadable funds for consumption purposes is shown by the , which is interest-elastic and slopes downward to the right. Lastly, the demand for loanable funds may come from those who wants to hoard money, i.e.. to satisfy the liquidity preference. Hoarding signifies the people’s desires to hold their savings as All important point tn be noted here is that the one who supplies the loanable funds is the same person who demands the loadable funds for hoarding. A saver who hoards his savings can be said to be supplying loanable funds and also demanding them to satisfy his liquidity preference.
Demand for The demand for hoarding money is interest-clastic and slopes downwards to the right. At higher rate of interest, people will hoard or hold less money, because much of the money will be lent tn take advantage of the higher interest rates. Similarly, at lower rates of interest, people will hoard more money, because the loss incurred by hoarding in this case is not very much.