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The economy’s market for loanable funds determined by the relationship between the interest rate and supply...

The economy’s market for loanable funds determined by the relationship between the interest rate and supply and demand of the funds. Explain.
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Answer #1

The total money demanded by the borrowers is the demand for loanable fund (negatively sloped). Again, the total money supplied by the lenders is the supply of loanable fund (positively sloped). Now, the intersection point between the demand and supply of loanable funds gives the interest rate. With increase in interest rate, demand for loanable funds falls, while, supply of loanable funds rises. Reversely, with fall in interest rates, demand for loanable funds rises, while, supply of loanable funds falls.

Thus, if demand for loanable funds shifts to the right, equilibrium interest rate rises, but, if, demand for loanable funds shifts to the left, equilibrium interest rate falls.

Similarly, if supply for loanable funds shifts to the right, equilibrium interest rate falls, but, if supply for loanable funds shifts to the left, equilibrium interest rate rises.

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