What role does the loanable funds market play in getting the leakages injected back into the economy?

What role does the loanable funds market play in getting the leakages injected back into the economy? How does this market clear? (clear meaning reach equilibrium)

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Expert Solution

Leakages take place when people keep funds with themselves as savings. These savings are issued as loans to some other people or entities and becomes the part of broader market of loanable funds. It makes these savings (as leakages) to come back again in the economy and get utilized. Hence, it is said that market for loanable funds help these savings to come back into the economy.

People save money to get a higher interest rate in the loanable funds market and supply their funds. When leakages go back into the market, then it increases the supply of loanable funds and supply curve shifts to the right. It decreases the interest rate and equilibrium is established. It is in the result of all types of funds (leakages as well as deposits) coming back to the market. It clears the market and prevent people taking undue advantage of higher interest rate in the market.

Rahul Sunny answered 1 year ago

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