In a large open economy, which of the following is the primary source of demand for loanable funds?

• A. Net exports of goods and services
• B. Foreign direct investment inflows
• C. Government budget surpluses
• D. Domestic investment by firms and households

Answer: (D)

Verified step by step guidance

1. Understand the concept of the loanable funds market, which is where savings are supplied and investment demands funds for financing projects.
2. Recognize that in a large open economy, the demand for loanable funds primarily comes from domestic agents—firms and households—who need funds to invest in capital goods, housing, and business expansion.
3. Analyze the options: Net exports and foreign direct investment inflows relate to international capital flows, which affect the supply side of loanable funds rather than the demand side.
4. Government budget surpluses represent public saving, which contributes to the supply of loanable funds, not the demand.
5. Conclude that domestic investment by firms and households is the primary source of demand for loanable funds because they borrow to finance their investment activities.