Saturday, August 29, 2009

Business Demand for loanable funds

the credit demands of business generally are more responsive to changes in the rate of interest than is consumer borrowing. Most business credit is for such investment purposes of inventories and new plant and equipment. As noted earlier in our discussion of the classical theory of interest, a higher interest rate eliminates some business investment projects from consideration because their expected rate of return is lower than the cost of funds. on the other hand, at lower rates of interest, many investment projects will be profitable, with their expected returns exceeding the cost of funds. therefore, the demand for loanable funds from the business sector increases as the rate of interest falls.

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