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Supply of Loanable Funds

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1. Why is the supply of loanable funds up sloping? why is the demand for loanable funds down sloping? Explain the equilibrium interest rate. List at least 3 factors that might cause the equilibrium interest rates to change.

2. How do the concepts of accounting profit and economic profit differ? Why is the economic profit smaller than accounting profit. What are the three basic sources of economic profit?

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Why is the supply of loanable funds up sloping? why is the demand for loanable funds down sloping?

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Supply of loanable funds is up sloping because supplier of funds or lenders will be willing to provide more funds at higher interest rates as compared to lower interest rates. Therefore, with increasing interest rates, supply of funds will rise.

Similarly, demand for loanable funds will be down sloping because debtors will be willing to take less funds for investment and other projects at higher rates as the high cost of capital or fund will not yield any benefit to them. Similarly, at lower interest rates, many ...

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Sheetal Jain, PGDM
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  • BComm, University of Delhi
  • Post Graduate Diploma in Management (Equivalent to MBA), All India Management Association
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