Question

The loanable funds theory can best be described as involving: (Check all that apply) a. Using...

The loanable funds theory can best be described as involving: (Check all that apply)

a. Using investor risk-aversion to infer an appropriate interest rate.

b. Credit risk which affects the demand for funds.

c. The legal frictions that can encourage or discourage borrowing.

d. The supply and demand for funds.

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Answer #1

D.The supply ad demand for funds.

In loanable funds theory demand and supply of loanable funds determines interest rate. Loanable funds means or includes loans,bonds there will be savers and investors there. Rate of interest is fixed by finding equilibrium point of level of saving and level of investment. Supply is relted to savings of savers and demand is related with demand. When the interest rate is high, the availability of funds increases that is supply increases but the demand will be lower or borrowing will be lower. Vice Versa.

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