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Which of these factors can affect financial capital cost and availability? 1.)   ...

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lilylee | Student, College Freshman | (Level 1) Salutatorian

Posted June 3, 2013 at 2:12 PM via web

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Which of these factors can affect financial capital cost and availability?

1.)    Monetary policy

2.)    Fiscal policy

3.)    Economic conditions

4.)    Regulations

5.)    Competition for financial capital

6.)    Market structure

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted June 4, 2013 at 5:15 AM (Answer #1)

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All of these factors can affect the availability and cost of financial capital.  Let us look at how this is possible.

  • Monetary policy affects how much money is available to be lent and it affects the price of lending.  The Fed can change interest rates, thus affecting the price of money.  It can also buy or sell government securities.  This affects the amount of money that can be borrowed.
  • Fiscal policy also tends to affect how much money can be borrowed.  If the government reduces taxes, for example, people have more money and are more likely to save that money.  That makes the money available to be borrowed.
  • Economic conditions clearly have an impact on how much money can be borrowed.  One way that this works is that banks will make lending decisions based on economic conditions.  They will, for example, be much less willing to lend if economic conditions are poor and they fear they will not get their money back.
  • Regulation can affect how much money can be borrowed.  If regulators place limits on the sorts of loans that banks can make, for example, the banks will be less able to lend.
  • Competition for financial capital matters.  If there are more borrowers who wish to borrow, the price of borrowing will rise.
  • Even market structure matters.  The more banks there are, the more money there is likely to be available for firms to borrow.

In these ways, all of these factors affect the availability and price of financial capital.

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