14. Explain how the equilibrium loanable funds interest rate is determined. Draw a graph to illustrate what the equilibrium rate of interest might look like.
Answer: The two forces of supply and demand for loanable funds determine not only the volume of lending and borrowing but also the rate of interest. The interest rate tends toward the equilibrium point at which the supply of loanable funds equals the demand for loanable funds. This point of equilibrium is shown in Exhibit 5.5 at iE. Please refer to Exhibit 5.5 in the text for a graph of the equilibrium rate of interest under the Loanable Funds theory.