Government Demand for Loanable Funds

Government Demand for Loanable Funds is a growing factor in the nation‘s financial markets but does not depend significantly upon the level of interest rates. This is especially true of borrowing by the federal government. Federal decisions on spending and borrowing are made by Congress in response to social needs and the public welfare, not the rate of interest. Moreover, the federal government has the power both to tax and to create money in order to pays its debts. State and local government demand, on the other hand, is slightly interest elastic since many local governments are limited in their borrowing activities by legal interest-rate ceilings. When open-market rates rise above these legal ceilings, some state and local units of government are prevented from offering their securities to the public