The loanable funds market is a model used to represent the market for borrowing and lending in an economy. On the vertical axis of the graph is the real interest rate, and on the horizontal axis is the quantity of loanable funds. The supply curve represents the amount of funds that lenders are willing to lend at different interest rates, while the demand curve represents the amount of funds that borrowers are willing to borrow at different interest rates. The intersection of the supply and demand curves represents the equilibrium real interest rate and quantity of loanable funds.
A decrease in the money supply would lead to an increase in the real interest rate. This can be shown on the graph by shifting the supply curve to the left, which would result in a higher equilibrium real interest rate and a lower equilibrium quantity of loanable funds.
At the original equilibrium, there would be a shortage of loanable funds because at the original interest rate, the quantity of funds demanded would exceed the quantity of funds supplied.
Lenders of existing fixed-rate loans would be better off as a result of the increase in the real interest rate because they would be receiving a higher return on their loans.
Investment spending on facilities and equipment in this economy would likely decrease because the higher real interest rate would make borrowing more expensive for firms. This would reduce their incentive to invest in new facilities and equipment.