LOANABLE FUNDS THEORY OF INTEREST
The loanable funds theorists believed in the Time Preference explanation of how interest arises. According to Loanable Funds Theory, also called the Neoclassical Theory. interest is the price paid for the use of loanable funds. Like the Classical and Keynesian theories of interest. it is also a demand and supply theory. It asserts that rate of interest is determined by the equilibrium between demand and supply of loanable funds in the credit market. There are several sources of both supply and demand of loanable funds which we discuss below.
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