Final answer:
The correct answer is that households provide the funds into the financial system allowing for borrowing by the government and firms. This happens through savings and capital inflow from foreign investors, balanced against private investment and government borrowing.
Step-by-step explanation:
The flow of funds from households into the financial system makes it possible for government and firms to borrow. In the U.S. economy, there are two main sources of financial capital supply: saving by individuals and firms, and the inflow of financial capital from foreign investors, which relates to the trade deficit (imports minus exports). There are also two main sources of demand for this capital: investment by the private sector and borrowing by the government, particularly when government spending exceeds taxes collected. There are macroeconomic views that whenever governments engage in borrowing, there must be an increment in household savings, a decrement in private firms borrowing, or an increment in foreign investments.