Which of the following is true about the loanable funds market?

• A. The supply of loanable funds comes exclusively from government savings.
• B. An increase in the demand for loanable funds leads to a decrease in the interest rate.
• C. The interest rate is determined by the supply and demand for loanable funds.
• D. Only banks participate in the loanable funds market.

Answer: (C)

Verified step by step guidance

1. Understand the loanable funds market as a conceptual framework where the interest rate is determined by the interaction of supply and demand for loanable funds.
2. Recognize that the supply of loanable funds typically comes from private savings, government savings, and sometimes foreign capital, so it is not exclusively from government savings.
3. Know that an increase in the demand for loanable funds, holding supply constant, generally leads to an increase in the interest rate, not a decrease.
4. Acknowledge that the interest rate acts as the price that equilibrates the quantity of loanable funds supplied and demanded.
5. Realize that participants in the loanable funds market include households, firms, governments, and financial institutions, not only banks.