Question

1. Explain “loanable funds market”?

2. Is “saving” necessary for “investment”?

3. How the government can influence the loanable funds market outcomes?

Answer 1

A. Loanable funds market is basically that market where the interest rate is determined with the help of the demand and supply forces of loanable funds.
Loanable funds market depends on various factors where interest plays an important role and it is based on the demand of loans and supply of loans all the flexibility in the interest rate is totally based on demand and supply factors of the loanable funds.
Loanable funds market working is totally based on the interaction of borrowers and the savers in the economy therefore the interest rate is a factor of bargaining between the borrowers and the savers.
B. Saving is necessary for the investment because saving is called as the future investment all types of investment is totally based on the saving part of the economy because if the individuals are not going to save the amount then it is not possible for all types of the bank to provide the money to the investors and to the borrowers.
In the equilibrium situation, full-employment equilibrium is existing at that point where saving is equal to investment therefore saving is very important for the investment.
C. The government can influence the loanable funds market outcomes by providing the guidelines and the instructions to manage the market as per the tax policies and the instruction over the interest rate policies to control and to manage the price stability in the economy and to handle the inflationary and deflationary situation in the economy.