Final answer:
The demand for loanable funds in an economy is primarily determined by households and businesses, as they are the main demanders of financial capital when they need to borrow for investments, large purchases, or operational costs.
Step-by-step explanation:
The demand for loanable funds in an economy is primarily determined by households and businesses. This demand represents the need for money by these groups, often for purposes such as financing investments in facilities, materials, and human capital. Businesses seek financial capital to fund their expansion and operational activities, while households may require funds for large purchases or investments. Conversely, they supply financial capital when they save or make financial investments.
Government fiscal policy can influence the demand for loanable funds through its own borrowing activities. When the government runs a budget deficit, it raises demand for funds by issuing Treasury bonds. Financial institutions, such as banks, serve as intermediaries by offering various accounts and certificates of deposit, coordinating the supply and demand in the financial capital market. Lastly, some of the funds for government borrowing can come from foreign financial investors, affecting interest rates and exchange rates.