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In: Economics

a decline in the supply of loanable funds will cause?

a decline in the supply of loanable funds will cause?

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Expert Solution

Lonable funds are the funds which are ready to be loaned out. These funds are supplied by the savings of the people which they keep in the banks in different types of deposits. The banks provide loans on the basis of the amount of deposits they have.

There are Demands and Supply of lonable funds as like any other goods and services. The demand for lonable funds depends on the rate of interest to be paid on loans and the supply of lonable funds depends on the rate of interest which is earned on the bank deposits.

The market for lonable funds is shown graphically as-

The demand and supply curves of the lonable funds intersect and decides the rate of interest (i) and the amount of lonable funds Q.

But when there is decline in supply of lonable funds, the supply curve shifts to S1 and as a result of this decline in supply the rate if interest i rises to i1 and the quantity of the lonable funds declines to Q1.

Rahul Sunny answered 2 months ago
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