Question

ln the loanable funds market, what variable changes to eliminate a shortage of loanable funds and how is the shortage eliminated?

Answer 1

In the Market for Loanable Fund, it is the interest rate which determines the supply and demand for the loanable fund. If the interest rates are high, the demand for the funds will be low and the supply of funds i.e. people saving will be high. This will put a downward force on the interest rate, it will start decreasing and it will decrease to a point where the demand for the funds i.e. Investment is equal to the Supply of the funds i.e. Saving.

If the interest rates are low the demand for funds or investment will be high and supply of funds or saving will be low. This will put an upward pressure on the interest rates and it will rise to a point the demand and supply are equal.

SO, in a loanable fund market, it is the interest rate which changes to eliminate the shortage of loanable funds and the shortage is eliminated by adjusting the investment and saving in the economy.