Final answer:
In the market for loanable funds, a 5% interest rate affects both borrowers and lenders, with borrowers looking for a return higher than the interest rate and lenders seeking income from lending. An increase in available loanable funds can decrease the interest rate through supply and demand dynamics.
Step-by-step explanation:
If the interest rate is 5% in the market for loanable funds, this rate will influence the decisions of borrowers and lenders. For potential borrowers, a 5% interest rate means the cost of borrowing is relatively low or high depending on the market conditions and prevailing interest rates. If the borrowed funds can generate a return higher than 5%, then investments or purchases may be prompted.
For lenders, a 5% interest rate represents the potential income from lending their money. An interest rate of 5% could make saving and lending more attractive than other investment opportunities, especially if the risk is perceived to be low.
When there is a shift in the market such as an increase in the amount of available loanable funds, more people are willing to lend money, which can drive the interest rate down due to the increased supply of funds. Consequently, if the demand for funds remains unchanged, borrowers will benefit from lower borrowing costs.