The intersection of the demand for loanable funds and the supply of loanable funds determines the A) prevailing interest rate B) par value C) price/earnings ratio D) real interest rate
The answer here would be option D) or real interest rate.
Explanation:
The market for loanable funds is a monetary or financial market where the main good or commodity being bought and sold or commercially exchanged is money.
The borrower of money constitute the buyer in this market and whose who save money are the main suppliers of money or loanable funds in the market.
The price or the value of money is represented by the market interest rate which has a positive direct relationship with the supply of money or loanable funds and an inverse or negative relationship with demand for money by the borrowers.This implies that as the market interest rate increases,the suppliers want to supply more of their monetary or financial savings in the form of financial loans to the borrowers with the anticipation of higher returns on the respective loans and vise versa.On the other hand,the borrower's demand for loanable funds or money decreases as the market interest rate increases,as now they would have to pay more on any financial borrowings in the market.
The demand and supply of loanable funds intersect at the point in the market where both are equal and the market interest rate at which they intersect is identified as the real interest rate in the loanable funds market in any economy.
