Question

What is the loanable funds theory? For example, how is each participants consumption impacted given the loanable funds theory?

Answer 1

Loanable funds includes all forms of credit, such as loans, bonds, and savings deposits. Loanable funds theory is a theory of the market interest rate. According to this theory, the interest rate is determined by the demand for and supply of loanable funds.

Deficits can impact the participant's consumption and cause shift in demands in two ways-

Deficits increase the demand for loanable funds; surpluses decrease the demand for loanable funds.

If the government runs a deficit, it has to borrow money. So, if there is a deficit, the demand for loanable funds will increase because the government gets in line to borrow money just like all of the other borrowers.

Deficits decrease the supply of loanable funds; surpluses increase the supply of loanable funds.

National savings includes public savings and national savings is the source of the supply of loanable funds. So anything that makes Public savings smaller (like a deficit) or bigger (like a surplus) will shift the supply of loanable funds

Incase of any doubt, please comment below. I would be happy to help.
Show your appreciation by upvoting the answer if it was of help to you.