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Loanable Funds Supply
The supply of laonable funds is derived from four basic sources, namely savings, dishoardings, disinvestment and the bank credit.
(a) Savings: savings by an individual or household constitute the most important source of loanable funds. This is equal to the difference between the income of the proceeding period and the consumption of the present period. The amount of savings in whatever sense it is used varies with the changes in the rate of interest. It would be more at a higher rate of interest and lesser rate of interest. Some savings may also be made by business firms. Undistributed profits constitute corporate savings as a substitute for borrowing from the market. But these corporate savings do not enter the market for loanable funds. Such savings are indicated as curve S in fig. 3.
(b) Dishoarding: it is another source of loanable funds. Savings which kept manufacture may be released into the market. If the rate of interest rises more money will be hoarded. These funds are presented by the curve DH in fig.
(c) Bank Credit: banking system provides loanable funds in the process of manufacture of money. Money credited by banks adds greatly to the supply of loanable funds. Generally speaking, banks lend money at higher rates of interest than at other firms. Bank credit is shown by the fig.
(d) Disinvestment: the supply of loanable funds will depend upon the disinvestment. It takes place due to structural changes under which the existing stock of capital equipment is allowed to wear out without being replaced. When this happens part of the revenue from sale of the products instead of going into capital replacement, goes into the market for loanable funds. This kind of disinvestment is encouraged by a high rate of interest DI as shown in fig. to be sloping upward to the right.
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(a) Savings: savings by an individual or household constitute the most important source of loanable funds. This is equal to the difference between the income of the proceeding period and the consumption of the present period. The amount of savings in whatever sense it is used varies with the changes in the rate of interest. It would be more at a higher rate of interest and lesser rate of interest. Some savings may also be made by business firms. Undistributed profits constitute corporate savings as a substitute for borrowing from the market. But these corporate savings do not enter the market for loanable funds. Such savings are indicated as curve S in fig. 3.
(b) Dishoarding: it is another source of loanable funds. Savings which kept manufacture may be released into the market. If the rate of interest rises more money will be hoarded. These funds are presented by the curve DH in fig.
(c) Bank Credit: banking system provides loanable funds in the process of manufacture of money. Money credited by banks adds greatly to the supply of loanable funds. Generally speaking, banks lend money at higher rates of interest than at other firms. Bank credit is shown by the fig.
(d) Disinvestment: the supply of loanable funds will depend upon the disinvestment. It takes place due to structural changes under which the existing stock of capital equipment is allowed to wear out without being replaced. When this happens part of the revenue from sale of the products instead of going into capital replacement, goes into the market for loanable funds. This kind of disinvestment is encouraged by a high rate of interest DI as shown in fig. to be sloping upward to the right.
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