The equilibrium interest rate is determined by the intersection of the demand and supply curves in the market for loanable funds Capital and the Loanable Funds Market If the quantity of capital demanded varies inversely with the interest rate, and if the interest rate is determined in the loanable funds market, then it follows that the demand for capital and the loanable funds market are interrelated Because the acquisition of new capital is generally financed in the loanable funds market, a change in the demand for capital leads to a change in the demand for loanable funds—and that affects the interest rate A change in the interest rate, in turn, affects the quantity of capital demanded on any demand curve The relationship between the demand for capital and the loanable funds market thus goes both ways Changes in the demand for capital affect the loanable funds market, and changes in the loanable funds market can affect the quantity of capital demanded Changes in the Demand for Capital and the Loanable Funds Market Figure 13.4 "Loanable Funds and the Demand for Capital" suggests how an increased demand for capital by firms will affect the loanable funds market, and thus the quantity of capital firms will demand In Panel (a) the initial interest rate is r1 At r1 in Panel (b) K1 units of capital are demanded (on curve D1) Now suppose an improvement in technology increases the marginal product of capital, shifting the demand curve for capital in Panel (b) to the right to D2 Firms can be expected to finance the increased Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 703