Why when there is a greater supply of loans the interest rates fall? Does this have to do with the loanable funds market and if so how?

Expert Answers

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The loanable funds market is just a hypothetical thing -- just a model that economists use to illustrate what is going on in the actual market for loans.

In this market, people (savers) and banks have money that they want to loan out at interest.  Businesses and consumers want to borrow money to buy capital or consumer goods.

When there is a greater supply of loans, the equilibrium price of the money will drop.  This is just because there is a surplus.  As you know from basic economics, when there is a surplus of any good or service, its price must drop.

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