Discuss the Loanable Funds theory of interest rate determination.

Question

26 Oct 2021

Answer :

Word Count : 304

The Loanable Funds theory is a fundamental concept in microeconomics that explains the determination of interest rates in financial markets. This theory suggests that the interest rate is determined by the interaction of the supply and demand for loanable funds, which are essentially savings and investment.

On the supply side, individuals, businesses, and governments contribute to the pool of loanable funds by saving a portion of their income. The higher the level of savings in an _______ ___ _________ ___ ___ ____.
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