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Explain how a strong economy will impact interest rates in the loan market?

Explain how a strong economy will impact interest rates in the loan market?

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A strong economy boosts consumer confidence and business confidence, therefore borrowing rises, increasing the demand for loanable funds. This shifts the demand for loanable funds rightward, increasing the interest rate. In following graph, D0 and S0 are initial demand and supply of loanable funds, intersecting at point A with initial interest rate r0 and quantity of loanable funds Q0. As demand rises, demand curve shifts right to D1, intersecting S0 at point B with higher interest rate r1 and higher quantity of loanable funds Q1.

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