Loanable Funds Theory of Interest

When learning about the loanable funds theory of interest, it is important to remember that interest rates are a price…just like anything else in economics.

More specifically, interest rates are the price of money.

Just like any price, its equilibrium is set by the intersection of Supply and Demand.

Demand for Loanable Funds (DLF)

The Demand for Loanable Funds (DLF) is made up of people looking to borrow money to invest (most likely in a business).

This is why the Demand for Loanable Funds, DLF, is equal to the level of gross investment, or I.

Written mathematically, this can be displayed as:

DLF = [Gross Investment]

Graphically, it can be displayed as:

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