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How do we apply the loanable funds market model?

How do we apply the loanable funds market model?

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Answer #1

Suuply of loanable funds market is the amount of money available to lend by people while demand of loanable funds is the amount of money people wants to borrow. Supply of loanable funds is upward sloping because people raise their quantity supplied of loanable funds when rate of interest rises. Demand of loanable funds is downward sloping because people borrow less money when rate of interest is high and vice versa. Equilibrium in loanable funds market when demand of loanable funds = supply of loanable funds. In the diagram below, equilibrium rate of interest is IR1 while quantity of loanable funds is Q1.

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