Study GuideEconomics–Capital Market1. Capital, Loanable Funds, Interest Rate1.1Capital Markets: Who Supplies and Who Demands Capital?Capital markets are places wherecapital goods(like machines, tools, and buildings) are financed.•Firmsusuallydemand capitalbecause they need machines, factories, and equipment toproduce goods.•Householdsusuallysupply capital, but they do thisindirectly.•Instead of directly giving money to firms, householdssave part of their incomeand depositit in banks.•Banksthen lend these savings to firms.•Firms use these borrowed funds to buy capital goods.In short:Households save → Banks lend → Firms invest1.2 Loanable Funds: What Does the Term Mean?Loanable fundsare the funds that areavailable for borrowing.They include:•Household savings•Bank loansBecause firms often use borrowed money to invest in new capital goods, economists usually discusscapital markets in terms of thedemand and supply of loanable funds.Preview Mode
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