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How do we determine the equilibrium interest rate?

How do we determine the equilibrium interest rate?

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Answer #1

The equilibrium interest rate is determined in the loanable funds market. All lenders and borrowers of loanable funds are participants in the loanable funds market. The total amounf of funds supplied by lenders makes up the supply of loanable funds, while the total amount of funds demanded by borrowers makes up the demand for loanable funds. The demand curve for loanable funds is downward sloping , which implies that at lower interest rate borrowers will demand more funds for investment and vice-versa. The supply curve for loanable funds is upward sloping which implies that at higher interest rates lenders are willing to lend more funds to investors and vice-versa. The equilibrium interest rate is determined by the interesection of demand curve and supply curve for loanable funds.

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