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4.2 • Demand and Supply in Financial Markets 101

The economy has experienced an enormous inflow of foreign capital. According to the U.S. Bureau of

Economic Analysis, by the third quarter of 2021, U.S. investors had accumulated $34.45 trillion of foreign

assets, but foreign investors owned a total of $50.53 trillion of U.S. assets. If foreign investors were to pull their

money out of the U.S. economy and invest elsewhere in the world, the result could be a significantly lower

quantity of financial investment in the United States, available only at a higher interest rate. This reduced

inflow of foreign financial investment could impose hardship on U.S. consumers and firms interested in

borrowing.

In a modern, developed economy, financial capital often moves invisibly through electronic transfers between

one bank account and another. Yet we can analyze these flows of funds with the same tools of demand and

supply as markets for goods or labor.
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