4. Supply and demand for loanable funds

Interest rate 3% and Loanable funds 300 billions of dollars

The following graph shows the market forloanable fundsin a closed economy. The upward-sloping orange line represents the supply of loanable funds, and the downward-sloping blue line represents the demand for loanable funds.

Investment is the source of the supply of loanable funds. As the interest rate falls, the quantity of loanable funds supplied increases .

Suppose the interest rate is 2.5%. Based on the previous graph, the quantity of loanable funds supplied is less than the quantity of loans demanded, resulting in a shortage of loanable funds. This would encourage lenders to raise the interest rates they charge, thereby increasing the quantity of loanable funds supplied and decreasing the quantity of loanable funds demanded, moving the market toward the equilibrium interest rate of.

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