In the loanable funds market, a shortage of loanable funds occurs when the

Question

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A shortage of loanable funds occurs when the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied. This implies that borrowers are willing to borrow more funds at the prevailing interest rate than lenders are willing to lend. As a result, the interest rate will tend to rise until the quantity of loanable funds supplied equals the quantity of loanable funds demanded. This is represented by a movement along the demand and supply curves, not a shift. Therefore, options A, B and E are incorrect. Option C is also incorrect because it suggests that there is excess supply, when in fact there is excess demand.

In the Loanable Funds Market, a Shortage of Loanable Funds