Supply of Loadable Funds
The supply of loadable funds is derived from four basic sources, namely, (0) savings. (b) dis hoarding, (c) bank credit. and (d) disinvestment. (0) Savings, Savings by individuals or households constitute the most important source of loadable funds. In the lovable funds theory. savings are looked at in either of these two ways, firstly, as ex ante savings, i.e., savings planned by individuals at the beginning of a period in the hope of . expected incomes and anticipated expenditures on Savings. consumption; or secondly in the Robertson sense savings of the difference between the income of the preceding period and the consumption of the present period. In either case, the amount saved varies at various rates of interest. Savings by individuals and households primarily depend upon the size of their incomes. But, given the level of income. savings vary at various rates of interest. More savings will be forthcoming at higher rates of interest, and vice salver. Like individuals, businesses also save. A part of the earnings of a business concern is consumed as declared dividends; the undistributed part constitutes business or corporate savings. Such savings depend partly upon the current rate of interest. A high rate of interest is likely to encourage business savings as a substitute Cor borrowings from the loan market. But these business savings are cnen demanded for inve ••tment purposes by the firms themselves and. therefore, they do not enter the market for loanable funds. (b) AccOrding. This is another sources of loai able Individualistically may dis-hoard money from the hoarded stock of the previous period. Thus. cash balances, lying idle in a previous period. become acti balances in the present period and arc available as 10. – able funds. At higher rate of interest. more will oe discarded. At very low rates of interest. there IS : greater tendency to hold on to money. (e) bank Credit. The banking system provide J third source of loanable funds. Banks. by creal III credit money, can advance loans to the businessmen. Banks, can also reduce the amount of money by contracting their lending. The new money created by toe banks in a period adds greatly to the supply of loan funds. The supply curve of funds provided by banks is to some degree interest-Ascella it varies with various rates of interest. Generally speaking, the banks will lend more money at higher rates of interest than at lower ones, other things remaining the same. (d) Disinvestment. Disinvestment is the oPPO- . site of investment and takes place when, due to the structural changes or bad venture, the existing stock of machines and other equipment is allowed to w, oIr out without being replaced or when the inventories . are drawn below the level of the previous period. When this happens, a part of the revenue from the sale of the products, instead of going into capital replacement flows into the market for loanable funds. “Disinvestment is encouraged somewhat by a high rate of interest (In loadable funds. When the rate is high, some of the current capital may not produce a marginal revenue product to match this rate of interest. The firm JUICILY to let this capital run down and to put the depreciation funds in the loan market.” S Thus, disinvestment adds to the supply of Dl is the disinvestment curve and slopes upwards to the right. By the lateral summation of the four curves, saving (S), dis hoarding (DH), disinvestment (01), and bank credit (BM), we get the total supply curve of loadable funds which slopes upwards to the right showing that a greater amount of loadable funds will available at higher rates of interest, and vice versa.
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