State and local governments are bigger suppliers than is the federal government. When they do lend, they tend to supply loanable funds only for cash management purposes on a short-term basis. Therefore, the supply of loanable funds by governments tends to be fixed and unresponsive to interest rate changes. Foreigners Foreigners are a big source of loanable funds. The amount, however, depends upon rates of returns in other countries.
Foreigners lend based upon relative rates of return in the many different countries.
Foreigners also take currency and political risks into consideration in moving their money across borders. Therefore, the supply of loanable funds by foreigners is upward sloping and very responsive to interest rate changes. Banks are, by definition, are big sources of loanable funds. They take their excess reserves and make loans depending upon the interest rates they can obtain to cover their risks. As interest rates rise, banks are willing to assume more risk and make more funds available for loans.