Figure 5-1 shows the supply of savings curve. The curve has a positive slope due to the substitution effect of higher interest rates. As the interest rate r increases, the return from saving also rises. People reduce their present consumption and substitute in favor of savings, thus allowing for greater future consumption. Savings is undertaken by individuals, businesses, the government and foreign savers may also supply savings to the domestic market.
Private savings is undertaken by individuals and businesses.
If an individual does not spend all of her disposable income, then she supplies savings to the loanable funds market. Public sector savings refers to the government, including federal, state and local. Alternatively, governments that run budget deficits have negative savings and reduce the overall supply of savings available to the loanable funds market. Net foreign savings is the difference between money coming into a country's capital or loanable funds market from foreign savers minus the money that leaves the country as domestic savers are saving in foreign capital markets. Equilibrium in the Capital Market Click on a part of the graph for further information.