What is the theory of loan funds?

Composition of supply and demand of borrowing funds: According to the theory of borrowing funds, the interest rate is not determined by savings and investment, but by the equilibrium point of supply and demand of borrowing funds. Interest rate is the price of loan funds, and the factors that affect the supply and demand of loan funds are the factors that affect the change of interest rate. Therefore, the supply of loan funds is positively related to the interest rate, while the demand for loan funds is inversely related to the interest rate, and the balance between them determines the interest rate level.

According to the basic principles of economics, when the demand of bonds equals the supply, the bond market also reaches equilibrium, that is, the price P* when Bd=Bs demand equals the supply is called equilibrium price or market clearing price, and the interest rate i* corresponding to this price level is called equilibrium interest rate or market clearing rate. At this time, the supply of funds is equal to the demand for funds.