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Demand and supply in the market for Loanable fund determine the long-term real interest rate. In the short run, a change in the Federal funds changes the equilibrium real interest rate.
What is federal funds?
Federal funds, often directed to as fed funds, exist as surplus reserves that commercial banks and other financial institutions deposit at regional Federal Reserve banks; these funds can be lent, then, to other market parties with inadequate cash on hand to satisfy their lending and reserve needs.
Loanable funds consist of household savings and/or bank loans. Because investment in new capital goods exists frequently made with loanable funds, the demand and supply of capital are often examined in terms of the demand and supply of loanable funds. In economics, the loanable fund's doctrine exists as a theory of the market interest rate. According to this procedure, the interest rate is specified by the demand for and supply of loanable funds. The term loanable funds contain all conditions of the credit, such as loans, bonds, or savings deposits.
Hence, Demand and supply in the market for the Loanable fund define the long-term real interest rate. In the short run, a change in the Federal funds alters the equilibrium real interest rate.
To learn more about federal funds refer to:
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