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By the end of this section, you will be able to:

  • Identify the demanders and suppliers in a financial market.
  • Explain how interest rates can affect supply and demand
  • Analyze the economic effects of U.S. debt in terms of domestic financial markets
  • Explain the role of price ceilings and usury laws in the U.S.

United States' households, institutions, and domestic businesses saved almost $1.9 trillion in 2013. Where did that savings go and what was it used for? Some of the savings ended up in banks, which in turn loaned the money to individuals or businesses that wanted to borrow money. Some was invested in private companies or loaned to government agencies that wanted to borrow money to raise funds for purposes like building roads or mass transit. Some firms reinvested their savings in their own businesses.

In this section, we will determine how the demand and supply model links those who wish to supply financial capital (i.e., savings) with those who demand financial capital (i.e., borrowing). Those who save money (or make financial investments, which is the same thing), whether individuals or businesses, are on the supply side of the financial market. Those who borrow money are on the demand side of the financial market. For a more detailed treatment of the different kinds of financial investments like bank accounts, stocks and bonds, see the Financial Markets chapter.

Who demands and who supplies in financial markets?

In any market, the price is what suppliers receive and what demanders pay. In financial markets, those who supply financial capital through saving expect to receive a rate of return, while those who demand financial capital by receiving funds expect to pay a rate of return. This rate of return can come in a variety of forms, depending on the type of investment.

The simplest example of a rate of return is the interest rate    . For example, when you supply money into a savings account at a bank, you receive interest on your deposit. The interest paid to you as a percent of your deposits is the interest rate. Similarly, if you demand a loan to buy a car or a computer, you will need to pay interest on the money you borrow.

Let’s consider the market for borrowing money with credit cards. In 2014, almost 200 million Americans were cardholders. Credit cards allow you to borrow money from the card's issuer, and pay back the borrowed amount plus interest, though most allow you a period of time in which you can repay the loan without paying interest. A typical credit card interest rate ranges from 12% to 18% per year. In 2014, Americans had about $793 billion outstanding in credit card debts. About half of U.S. families with credit cards report that they almost always pay the full balance on time, but one-quarter of U.S. families with credit cards say that they “hardly ever” pay off the card in full. In fact, in 2014, 56% of consumers carried an unpaid balance in the last 12 months. Let’s say that, on average, the annual interest rate for credit card borrowing is 15% per year. So, Americans pay tens of billions of dollars every year in interest on their credit cards—plus basic fees for the credit card or fees for late payments.

Questions & Answers

what courses the curve to move
Siphelele Reply
is it possible to say scarcity is the out come of excessive greed on the part of human?
Kwame Reply
TU=3Q2-2Q+4.what is Total utlity maximize?
Lema Reply
what is demand
Brenda Reply
Total utlity=3Q2-2Q+4.what is maximum TU?
Lema
with excues,can i help you this question?
Lema
Where can i find the Quizzes
Thubelihle Reply
what is ppf?
Ishimwe Reply
production possibility frontier
Alam
the production possibility frontier (PPF) is a curve that illustrates the variations in the amounts that can be produced of two products if both depend upon the same finite resource for their manufacture
Alam
thank you!
Ishimwe
it is the production possibility frontier
Brenda
In perfect competition, some firms make profit, others breakeven and others make losses. Explain
ALVIN Reply
define law of demand and draw demand curve
Naseer Reply
state that the higher the price of a product the lower the quantity demanded
nonduduzo
what is the price elasticity of demand a unit free measure of the sensitivity of the quantity demand to a price change?
ada Reply
what is normative economics
kanakadurga Reply
In normative economics we try to understand whether a mechanism is desirable or not.
arshad
not
Mark
consider the market for chocolate chip cookies .suppose there is an increase in the price of cake flour used in the production of chocolate chip cookies . Demonstrate graphically and explain the effects this will have on the equilibrium price and quantity of chocolate chip cookies.
Costa Reply
what is price demand?
Alamin Reply
what is the price demand ?
Alamin
what is cardinal approach?
Alamin
importance of elasticity to an economy
Nayiga Reply
what is elasticity
Costa Reply
elasticity refers to the measurement of a percentage change of one economic variable in response to a change in another. Primarily, this percentage change will follow a change in price relative to changes in other factors.
Abdullahi
When desire of goods increases what is the respond of its prices?
abubakar Reply
Then definitely price of Good will increase, As Demand has direct relation with the price
Alam
Right
abubakar

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Source:  OpenStax, Microeconomics. OpenStax CNX. Aug 03, 2014 Download for free at http://legacy.cnx.org/content/col11627/1.10
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