Final answer:
The equilibrium in the market for loanable funds is shown on a graph where the supply and demand curves intersect, representing an equilibrium interest rate and quantity of financial capital, without the influence of government deficits or international capital flows.
Step-by-step explanation:
The market for loanable funds is depicted as an equilibrium where the demand for capital by borrowers intersects with the supply of capital by savers. To illustrate this, draw a graph with an upward-sloping supply curve (S) and a downward-sloping demand curve (D). Label the x-axis as 'Quantity of Financial Investment' and the y-axis as 'Interest Rate'. In the absence of government budget deficits and international capital flows, the equilibrium (E) occurs at the intersection of S and D, indicating an interest rate where the quantity of funds supplied equals the quantity of funds demanded.
For example, drawing from Figure 4.5 as a reference but omitting the capital inflows, in this scenario, the equilibrium exists without the need to consider external sources of capital. If we assume a hypothetical interest rate at equilibrium to be 15% and a quantity of financial capital at $600 billion, this point on the graph represents where the market for loanable funds has reached equilibrium. At interest rates above this point, there will be an excess supply of loanable funds, and at rates below it, an excess demand.