Posted: October 17th, 2013
Household demand for funds and deposits responds to interest rates changes. A rise in interest rates remunerated by saving institutions causes the households to move their liquid assets to time deposits type from the demand deposits type. A rise in the interest rates may also cause the households to purchase marketable securities reducing demand and time deposits. Households’ consumption increase with increased income and not wealth. The preference to save overcomes the household’s preference to consume wealth. Availability of bank credit influences household consumption and saving decisions. In the US, the debt service to income is an important determinant of the future consumer spending and increase in income. Financial institutions respond to changes in households’ earnings, security and debt level by restricting credit access if the borrower’s ability to repay is affected (Ross & Ross, 2008).
Liquidity limitation can influence the composition of the household’s balance sheet. This may influence the corporate sector since the household’s consumption greatly affects the domestic output. The household’s involvement in the equity market influences the aptitude of firms to raise funds for investment purposes. In this case, households directly affect the banks. Households spend their income on goods and services that come from the firms. These firms produce these goods with the help of the labor provided with the households, capital and knowledge and in return, they offer salaries to the laborers, interest and dividends. Banks, on the other hand, act as financial intermediaries providing a continuous flow of funds from the savers to the borrowers (Hussain, 2000).
This process enables the flow of funds statement to be accompanied by a balance sheet of all the sectors that the flow of funds has been calculated. This enables the U.S reserve board to show the outstanding amounts. In addition, since the household items in the flow of funds are resulted as remainders from the information relating to other factions in the economy, improvement of the information that is not household information greatly benefits personal saving. This process enables distribution and use of income accounts. This enables use of these accounts by households. Government and non-profit organizations Use these accounts to serve households in their ultimate consumption and saving (Shim & Siegel, 2000).
Hussain, I. (2000). Household sector saving and wealth accumulation: Evidence from balance sheet and flow of funds data. London: Financial Services Authority.
Ross, S. A., & Ross, S. A. (2008). Modern financial management. Boston: McGraw-Hill/Irwin.
Shim, J. K., & Siegel, J. G. (2000). Financial management. Hauppauge, N.Y: Barron’s.
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