Loanable funds refer to the total amount of money that has been saved and invested in financial markets, which is then available for lending to borrowers. The loanable funds market is a part of the broader interest rate system that plays a crucial role in the economy. The interest rate system is responsible for regulating the flow of funds between savers and borrowers, as well as influencing investment and consumption decisions.
The extent to which the loanable funds are cleared in the interest rate system depends on the level of interest rates in the economy. When interest rates are high, savers are less willing to lend their money to borrowers, as they can earn a higher rate of return by keeping their money in savings accounts or other low-risk investments. Conversely, when interest rates are low, savers are more likely to lend their money to borrowers, as they can earn a higher return by investing in higher-risk assets.
Furthermore, increasing the size of the loanable funds market can help to increase the availability of credit and reduce interest rates in the economy. This can be achieved through measures such as encouraging more people to save and invest their money, and incentivizing banks and other financial institutions to lend more money to borrowers.
Overall, the interest rate system plays an important role in clearing the loanable funds market, and the size of the loanable funds market can impact the allocation of resources in the economy. By increasing the size of the market and balancing investment and saving, it is possible to attain macroeconomic balance and support economic growth.