What is the impact on the loanable funds market if the quantity of loanable funds supplied...

What is the impact on the loanable funds market if the quantity of loanable funds supplied is less than the quantity demanded?

Expert Solution

In the loanable funds market, there are borrowers and savers, borrowers create the demand for loanable funds and savers create the supply of loanable funds. Here the quantity of loanable funds is supplied by the savers in the economy that deposit the money in banks and the quantity of loanable funds is demanded by the borrowers in the economy that lend the money from the bank. Here interest rate determines the equilibrium in the loanable funds market (Just like prices determine the equilibrium in the goods market).

Equilibrium interest rates are achieved at the point where the quantity demanded of loanable funds equals the quantity supplied of loanable funds. But when the quantity of loanable funds supplied is less than the quantity demanded (or when the savers do not deposit enough money that the borrowers demand), then it leads to a rise in interest rates in the economy (due to shortage of loanable funds).

Thus, when the quantity of loanable funds supplied is less than quantity demanded, the interest rates rises in the market of loanable funds.

Rahul Sunny answered 2 years ago

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