What Is Demand For Loanable Funds And Its Criticism?

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Demand for loanable funds:
Aggregate demand for loanable funds is obtained by adding the individual demands of various sectors. This demand makes downward sloping curve indicating that more funds are demanded ar lower rates of interest.

Four sectors of the economy household, business, govenrment and foreign have demand for loanable funds. The sum of their separate demands makes the total demands.

Household sector needs loanable funds for purchasing goods and construction of houses. People borrow more money at lower interest rates.

Business sector wants loanable funds to purchase investment goods, plants, equipments, etc.

Government can also borrow when its budget is deficit. This demand is vertical because government demand is not dependant on level of its interest rate.

Foreign government and firms also borrow funds.

Thoery is criticised as under

Accordint to this theory the level of national income is constant but in real the level of income changes when the change comes in the level of investments in the country.

According to this theory saving hoarding investment are related to the rate of interest but the real investment is not to the rate of interest only. There are many otherfactors which are also effective in the investment in the country.

The theory just explains combine the real factors which effects the demand for and supply of loanable funds. But these both factors can be studied saparately, not only combined.

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