Question

1. The loanable fund model tells us that, other things being equal, capital will tend to flow from countries with __ to countries with __.
2. International differences in the demand for domestic loanable funds are primarily due to variations in __, while differences in the supply of funds generally reflect differences in __

Answer 1

Answer:

1) The loanable fund model tells us that, other things being equal, capital will tend to flow from countries with low interest rates to countries with high interest rates.

2) International differences in the demand for domestic loanable funds are primarily due to variations in investment opportunities , while differences in the supply of funds generally reflect differences in savings rate.

Explanation:

1) According to the loanable funds model people living in countries with low interest rate will move their money to other countries which have higher interest rates in order to earn a higher interest rate on their money. This is also known as hot money flow. For example If I live in UK has an interest rate of 4% and Germany has an interest rate of 8%, I will move my money to Germany to earn extra interest on my money. This is an example of money flowing from a country with low interest rate to a country with high interest rate.

2) There will be higher demand for loanable funds if there are more investment opportunities because people will borrow money to invest in other ventures in order to make more money than the interest they are paying, if the investment opportunities are low then the demand for loanable funds will also be low as people would not want to borrow money. And the supply of loanable funds is the money that people save in banks, so the higher the savings rate the higher the supply of loanable funds will be.