What is the Theory of Loanable Funds and the Real Interest Rate?

Knowledge of certain terms in the field of economics can allow us to be aware of the operations we carry out in entities or when making an investment. Therefore, we invite you to read this article with which you will learn what is the theory of loanable funds and the real interest rate.

The loanable funds theory

The theory of loanable funds is used in the field of economics to refer to the money available that can be borrowed. They are known as financial assets and they are related to bank loans and household savings.

The real interest rate

On the other hand, the real interest rate or also called “Real interest rate” It is a very important value that allows the clients of a bank to know how much they are charged when granting a loan through a loan management system, a credit, a mortgage or the profitability of keeping the money in savings accounts.

What is the theory of loanable funds and the real interest rate?

Both the profitable fund theory and the real interest rate are directly linked to supply and demand. Therefore, it is necessary to study these aspects in order to understand the phenomenon that occurs between those who want to ask for funds and those who offer them.

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Supply and demand

The offer refers to total financial savings while the demand is the total financing. The demand is divided into categories such as the public and private sectors and the offer includes the retirement savings system, pension funds, bank deposits, among others.

What is the loanable funds theory?

Loanable funds theory is a term used to determine the interest rate on funds in relation to supply and demand. Therefore, loanable funds refer to the money available to lend in an economy.

In general, companies and entities such as the credit bureau that provide goods and services are those who demand the capital. Equilibrium occurs when saving capital equals capital investment. Therefore, the loanable funds theory is used to determine the interest rate on a loan in order to maintain balance.

Who provides the loanable funds?

The entities that save as the credit circle are those who provide the loanable funds. Households can even provide loanable funds regardless of how much their members save. This happens when they store their money in savings accounts of banking entities.

How to represent the loanable funds theory?

In order to represent the theory of loanable funds, the national savings formula which must be equal to national investments plus net foreign investment. So the particular price of loanable funds is what is known as the interest rate.

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What is the real interest rate?

The real interest rate consists of obtaining a net return on the transfer of an amount of money or capital after taking into account the effects of inflation. In this sense, we can affirm that the profitability of an asset You must discount the loss caused by the phenomenon of inflation.

How is the real interest rate calculated?

In order to calculate the real interest rate, it is necessary to know the nominal interest rate and subtract it with the inflation rate. In addition, it is essential to obtain the calculation of the real profitability in order to measure the return on investment which should include price inflation.

In which operations is the real interest rate applied?

Frequently, the real interest rate is applied in operations such as investments after knowing the net return on the investment. Other operations are credits and online or personal loans with which we can know the real interest charged by an entity.

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