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Why does the supply of loanable funds slope upward?


Why does the supply of loanable funds slope upward?


Why does the supply of loanable funds slope upward? Why does the demand for loanable funds slope downward? Explain the equilibrium interest rate. List some factors that might cause it to change. LO18.3

Answer and explanationsSolution by a verified expert

The savings is the loanable funds' quantity supplied. The depositors deposit more money for a higher interest rate. As the interest rate increases the quantity supplied of the funds also increases. This direct relationship between the quantity supplied and interest rate makes the supply curve of loanable funds upward rising.

The loanable funds have a downward sloping demand curve. Some businesses need a low investment for earning a high profit, whereas some businesses earn a low profit for higher investment. This uncertain relation between profit and investment makes the demand curve downward sloping. In other words, if the interest rate increases, then the people will demand fewer amounts of loanable funds.

The expected return rate is equal to the interest rate at the equilibrium interest rate.

The supply of the loanable funds may be changed because of the change in the savings or change in the government's monetary policies. The loanable funds' demand could change for the change in the demand of final produced goods or technologies. The changing supply or demand will change the interest rate.

Verified Answer
The quantity supplied of the loanable fund increases (due to rise in savings) as the interest rate rises. This direct relation between interest rate and loanable funds makes the supply of the loanable funds upward rising.

The different projects have different rates of return. Some businesses earn higher profit with lower investment and some earn lower profit with higher investment. This makes the demand curve of loanable funds downward sloping.

The equilibrium interest rate is calculated by equating the expected return of rate and interest rate.

Loanable funds' supply change due to changes in savings or monetary policies. The demand for the funds changes due to the changes in technologies and demand for goods.

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