How does the market for loanable funds work?

• A. It is a market where banks set a fixed interest rate and allocate loans by administrative quotas, so the quantity of loans is determined by regulation rather than by saving and investment.
• B. It is a market where government budget deficits increase the supply of loanable funds, which lowers the interest rate and thereby crowds in private investment.
• C. It is a market where the central bank directly matches lenders and borrowers and controls loan quantities, so private saving has little effect on the equilibrium interest rate.
• D. It is a market where the supply of loanable funds comes from national saving and the demand comes from borrowers who want to invest; the interest rate adjusts to equilibrate saving and investment.

Answer: (D)