The loanable funds theory used to explain the level of interest rates holds that interest rates are a function of the supply of:
A) loanable funds and the demand for money
B) loanable funds and the demand for loanable funds
C) money and the demand for loanable funds
D) money and the demand for money

Question

Quizplus · Accepted Answer

The loanable funds theory states that interest rates are determined by the supply of and demand for loanable funds, which includes savings and investments. Therefore, option B – loanable funds and the demand for loanable funds – is the correct answer. Option A is incorrect because it includes the demand for money, which is not directly related to the loanable funds market. Option C is incorrect because the supply of money is not directly related to the loanable funds market. Option D is incorrect because it only includes money and demand for money, which is not directly related to the loanable funds market.

The Loanable Funds Theory Used to Explain the Level of Interest