Question

What is the difference between elastic and inelastic demand for loanable funds?

Answer 1

Answer-

The difference between elastic and inelastic demand for loanable funds are in terms of

1) Savings

2) Dishoarding

3) Bank money, and

4) Disinvestment.

All of these sources are dependent upon the rate of interest, that is, they are interest-elastic.
Savings are assumed to be interest-elastic; that is, the assumption was that the volume of saving increases with incomes and vice versa.
It was implied that savings by households depend on their income but the neoclassical implied that given the level of income, savings vary with the rate of interest.
Dishoarding means bringing out hoarded money into use and thus constitutes a source of supply of loanable funds.

The supply curve of bank money is interest-elastic.
The most important factor responsible for the demand for loanable funds is the demand for investment. Investment is expenditure of funds on the building up of new capital goods and inventories.
Rate of interest is obviously the cost of borrowing of funds for investment.

In other words, the demand for loanable funds for investment purposes rises with a fall inthe rate of interest, or is interest- elastic.