Question

Explain the relationship between foreigners and the supply of loanable funds?

Answer 1

Loanable funds are the money people save to lent out in market to investors such that savers can earn interest over it. The question here is not properly defined as it can be foreigners entering into the domestic market or the mentality of foreigners to save less. I am taking both cases.

When foreigners enters into the domestic market, demand of loanable funds rises and they are ready to pay more rate of interest to get fund which raises the equilibrium rate of interest in the market. If rate of interest, savers starts saving more to earn high interest rate which raises the supply of loanable funds. Thus foreigners into the market indirectly have positive relation with loanable funds.

If we consider the case when foreigners saves less, they tend to spend all the money they earn which reduces the overall savings in the economy which eventually reduces the loanable funds available in the market. Thus when foreigners saves less, foreigners and supply of loanable funds have inverse relation with each other.