The following graph shows the market for loanable funds in a closed economy. The upward-sloping orange line represents the supply of loanablefunds, and the downward-sloping blue line represents the demand for loanable funds.10Supply8Demand100200300400 500600 700 800900 1000LOANABLE FUNDS (Billions of dollars)is the source of the supply of loanable funds. As the interest rate falls, the quantity of loanable funds supplied increases vSuppose the interest rate is 4.5%. Based on the previous graph, the quantity of loanable funds supplied isv than the quantity of loansdemanded, resulting in av of loanable funds. This would encourage lenders tov the interest rates they charge,therebyv the quantity of loanable funds supplied andv the quantity of loanable funds demanded, moving the markettoward the equilibrium interest rate of5% .INTEREST RATE (Percent)

Demand for loanable funds is negatively related to interest rates. It means an increase in interest…

The following graph shows the market for loanable funds in a closed economy. The upward-sloping orange line represents the supply of loanable funds, and the downward-sloping blue line represents the demand for loanable funds. 10 Supply Demand 100 600 700 800 900 1000 INTEREST RATE (Percent) - O n . n N - O