Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

 
Check Your Progress: 
1. Differentiate between rent and economic rent. 
2. Write a note on Bilateral monopoly. 
 
 
 
 
 
 
 
 
4.8 LOANABLE FUND THEORY
This thory was developed, rather independently, by Wicksell, 
Robertson, and Davonport although Ohlin, Myrdal, and Viner also 
made valuable contributions. Basically, this neo-classical theory is 
a revised and improved version of the classical theory in which 
along with the real factors, monetary factors have also been 
included. 
According to this theory, rate of interest is determined by the 
demand for loanable funds and the supply of loanable funds. 
 
4.8.1 Demand for Loanable Funds: 
Demand for loanable funds comes from three sources: 
1. Investment Demand: It 
is, no doubt, the largest sources of demand 
for loanable funds. Investment means addition to the stock of 
capital assets; it also includes stocks of raw-materials and finished 
goods. The establishment of a new factory or business, the 
expansion of existing business, installation of a new machine are 
acts of investment. Investment is determined by the marginal 
efficiency of capital and the rate of interest. M.E.C. remaining the 
same, a lower rate of interest will encourage investment and a 
higher rate will discourage it. Thus there is an inverse relation 
between the rate of interest and investment. The Vestment curve is, 
therefore, negatively sloped. The investment curve is labelled II in 
Fig. 4.10 
2. 
Consumption Demand:
Demand for consumption loans constitutes 
another source of demand for loanable funds. Loans for 
consumption purposes are demanded generally for purchasing 

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durable consumer goods like cars, scooters, refrigerators, television 
sets, and houses, etc. Whereas a lower rate of interest will induce 
people to borrow more for consumption, a higher rate of interest 
discourages 
borrowing 
for 
consumption. 
Therefore, 
the 
consumption demand curve for loanble funds slopes downward 
from left to right and is labelled CD in Fig. 4.10