LOANABLE FUND THEORY Loanable Fund Theory was given by Wicksell,Ohlin,Myrdal and Robertson.

According to this theory rate of interest is deter ined by de and 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 invest ent in deter ination of rate of interest. SUPPLY OF LOANABLE FUNDS ". Savings (S) # $avings are ain source of su!!ly of loanable funds. %ndividual saving is the difference between inco e and e&!enditure. $aving is influenced by inco e and rate of interest. Rise in rate of interest leads to ore savings. 'usiness savings de!end on rate of interest. (igher the rate of interest, business fir s will save ore otherwise they have to borrow funds fro arket at high rate of interest. ). Bank Credit (B) #'ank *redit is interest elastic. At high rate of interest, banks will give ore credit and at low rate of interest bank will offer less credit. +. Dish arding (DH) #(oarding eans kee!ing wealth in the for of cash. When rate of interest is high !eo!le lend the hoarded oney and dishoard their savings. ,. Disinvest!ent (D") #%t eans non#re!lace ent of de!reciated achines. (igher the rate of interest, greater is disinvest ent and lower the rate of interest s aller is disinvest ent. SUPPLY OF LOANABLE FUNDS# S$B$DH$D" DE%AND FOR LOANABLE FUNDS ". %nvest ent -e and .%/ #Lower the rate of interest, greater will be the de and for loanable funds for invest ent. (igher the rate of interest, s aller will be the de and for loanable funds for invest ent. ). *onsu !tion .*/#0eo!le borrow oney when e&!enditure is greater than inco e. 0eo!le will borrow oney at low rate of interest. -e and for loanable funds will decrease at high rate of interest. +. (oarding .(/ # -e and for loanable funds is ade by those !eo!le also who want to hoard it. At low rate of interest, de and 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 deter ined at that !oint where de and for and su!!ly of loanable funds are e1ual.
-2MA3- FOR LOA3A'L2 F43-$ 5 $400L6 OF LOA3A'L2 F43-$ %7*7(5$7'7-(7-% .%#-%/7 .(#-(/ 5.$#*/ 7' 32T %382$TM23T732T (OAR-%39532T $A8%397'A3: *R2-%T

Diagra! &r ! ' k Total -e and *urve -- and total su!!ly curve $$ intersect each other at !oint 2 and OR is rate of interest.According to 0rof.Wicksell there are ) ty!es of arket rate# ". %arket Rate# %t is deter ined at that !oint where total de and for loanable funds is e1ual to total su!!ly of loanable funds. %t is OR as shown in the figure. ). Nat(ra) Rate# %t is deter ined at that !oint where total saving is e1ual to total invest ent.%T is O3 as shown in the figure. CR"T"C"S% ". Unrea)isti* ass(!+ti n & &()) e!+) ,!ent # This theory is based on unrealistic assu !tion of full e !loy ent. ). "gn res e&&e*t & invest!ent n in* !e # This theory ignores effect of invest ent on inco e. 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 invest ent which further leads to fall in inco e and fall in savings. +. "ndeter!inate# The theory states that rate of interest is deter ined by loanable funds.Loanable funds de!end on inco e and inco e de!ends on invest ent level which further de!ends on rate of interest. We cannot deter ine rate of interest without knowing inco e and without knowing inco e rate of interest cannot be deter ined. (ence theory is indeter inate. ,. S,nthesis & di&&erent &a*t rs#This theory has synthesi;ed real and onetary factors. %nfluence of these factors should be studied se!arately in deter ination of interest. <. D('i (s * n*e+t & h arding#The theory assu es that hoarding can be increased or decreased. 'ut this is wrong. According to :eynes 1uantity of oney re ains constant. %f one !erson hoards ore the other is co !elled to hoard less.