If the loanable funds market is in equilibrium, which of the following must be true?

• A. There is excess demand for loanable funds.
• B. The quantity of loanable funds supplied equals the quantity of loanable funds demanded.
• C. The government is the only participant in the market.
• D. The interest rate is zero.

Answer: (B)

Verified step by step guidance

1. Understand the concept of equilibrium in the loanable funds market: Equilibrium occurs when the quantity of loanable funds supplied equals the quantity of loanable funds demanded.
2. Recall that if there were excess demand for loanable funds, it would mean the quantity demanded exceeds the quantity supplied, which contradicts equilibrium.
3. Recognize that the government being the only participant or the interest rate being zero are not necessary conditions for equilibrium in the loanable funds market.
4. Express the equilibrium condition mathematically as: \(\text{Quantity Supplied} = \text{Quantity Demanded}\).
5. Conclude that at equilibrium, the interest rate adjusts to balance supply and demand, ensuring no excess demand or supply.