loanable funds

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A theory of the determination of the rate of interest by the need to equate the demand for funds for investment with the supply of available savings. This was popular in pre-Keynesian thinking, when the level of national income was taken as fixed by long-term supply-side factors. It is contrasted with the Keynesian liquidity preference theory, in which interest rates are determined by the need to equate the supply and demand for money balances. See also supply-side economics.

Subjects: Economics.

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