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LOANABLE FUND THEORY

Loanable Fund Theory was given by Wicksell,Ohlin,Myrdal and Robertson.According tothis theory rate of interest is deterined by deand for and su!!ly of loanable funds.This

theory consider onetary factors like hoarding of oney and bank credit and real factors

like saving and investent in deterination of rate of interest.

SUPPLY OF LOANABLE FUNDS

". Savings (S) # $avings are ain source of su!!ly of loanable funds. %ndividualsaving is the difference between incoe and e&!enditure. $aving is influenced by

incoe and rate of interest. Rise in rate of interest leads to ore savings. 'usiness

savings de!end on rate of interest. (igher the rate of interest, business firs will

save ore otherwise they have to borrow funds fro arket at high rate ofinterest.

). Bank Credit (B) #'ank *redit is interest elastic. At high rate of interest, banks

will give ore credit and at low rate of interest bank will offer less credit.

+. Disharding (DH) #(oarding eans kee!ing wealth in the for of cash. Whenrate of interest is high !eo!le lend the hoarded oney and dishoard their savings.

. Disinvest!ent (D") #%t eans non#re!laceent of de!reciated achines. (igherthe rate of interest, greater is disinvestent and lower the rate of interest saller

is disinvestent.

SUPPLY OF LOANABLE FUNDS# S$B$DH$D"

DE%AND FOR LOANABLE FUNDS

". %nvestent -eand %/ #Lower the rate of interest, greater will be the deand forloanable funds for investent. (igher the rate of interest, saller will be the

deand for loanable funds for investent.). *onsu!tion */#0eo!le borrow oney when e&!enditure is greater than incoe.0eo!le will borrow oney at low rate of interest. -eand for loanable funds will

decrease at high rate of interest.

+. (oarding (/ # -eand for loanable funds is ade by those !eo!le also whowant to hoard it. At low rate of interest, deand for loanable funds will be ore

and at high rate of interest, it will be less.

DE%AND FOR LOANABLE FUNDS# "$C$H

DETER%"NAT"ON OF "NTEREST

According to this theory, rate of interest is deterined at that !oint where deand for and

su!!ly of loanable funds are e1ual.

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Diagra! &r! 'k 

Total -eand *urve -- and total su!!ly curve $$ intersect each other at !oint 2 and OR is rateof interest.According to 0rof.Wicksell there are ) ty!es of arket rate#

". %arket Rate# %t is deterined at that !oint where total deand for loanable funds ise1ual to total su!!ly of loanable funds. %t is OR as shown in the figure.

). Natra Rate# %t is deterined at that !oint where total saving is e1ual to total

investent.%T is O3 as shown in the figure.

CR"T"C"S%

". Unreaisti* ass!+tin & & e!+,!ent# This theory is based on unrealistic

assu!tion of full e!loyent.

). "gnres e&&e*t & invest!ent n in*!e# This theory ignores effect of investent on

incoe. As !er this theory !eo!le will save ore at high rate of interest but this is not

correct. %n real life high rate of interest discourages investent which further leads to fall

in incoe and fall in savings.

+. "ndeter!inate# The theory states that rate of interest is deterined by loanablefunds.Loanable funds de!end on incoe and incoe de!ends on investent level which

further de!ends on rate of interest. We cannot deterine rate of interest without knowing

incoe and without knowing incoe rate of interest cannot be deterined. (ence theory

is indeterinate.. S,nthesis & di&&erent &a*trs#This theory has synthesi;ed real and onetary factors.

%nfluence of these factors should be studied se!arately in deterination of interest.

<. D'is *n*e+t & harding#The theory assues that hoarding can be increased or

decreased. 'ut this is wrong. According to :eynes 1uantity of oney reains constant.

%f one !erson hoards ore the other is co!elled to hoard less.