"Time is important in roundabout production but not in direct production." Is this statement true or false? Explain. Why does the demand curve for loanable funds slope down? Why does the supply...

"Time is important in roundabout production but not in direct production." Is this statement true or false? Explain. Why does the demand curve for loanable funds slope down? Why does the supply curve for loanable funds slope upward?

Asked on by racin3

1 Answer | Add Yours

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

The supply and demand curves for loanable funds slope in the way that they do for the same reason that all supply and demand curves slope in those ways.  This is because the people who are buying and selling loanable funds want to make the best possible deal for themselves.

To understand why these curves are sloped as they are, simply look at the labels for the axes.  The x-axis is the quantity of loanable funds while the y-axis is their price (the interest rate).  When the interest rate is high, very few people want to borrow money because it costs a great deal to do so.  As the interest rate drops, it becomes cheaper to borrow money and therefore more people want to do so.  This is why the demand curve slopes downward.  Conversely, when the interest rate is low, people do not want to loan their money because they do not get paid very much when they do so.  As the interest rate rises, they get a higher return on their money and more people want to loan funds.  This is why the supply curve slopes upward.

Thus, the supply and demand curves slope as they do because the people who buy and sell loanable funds want to do what is best for them.  The buyers of the funds want to buy at the lowest possible price while those who are selling the funds want to sell at a high price.

Sources:

We’ve answered 318,915 questions. We can answer yours, too.

Ask a question