Loanable Funds Theory

Loanable Funds Theory explains how the supply and demand for money influence interest rates in an economy. When people save more, they increase the supply of loanable funds, which can push interest rates down. Conversely, if borrowing increases, demand for these funds rises, potentially driving rates up. Essentially, the theory suggests that interest rates are determined by how much money savers are willing to lend and how much borrowers want to borrow. Changes in savings behavior, investment opportunities, or government policies can shift this balance, impacting the overall economy.