A decrease in the supply of loanable funds will increase interest rates and decrease quantity demanded of loanable funds.
The loanable funds market serves as an example of how savers and borrowers interact in the economy. It is a form of the market concept, but the "goods" being "purchased" and "sold" are actually sums of money that have been set aside.
Savings generate loanable money, which are then demanded by borrowers. When the real interest rate has been adjusted so that saving and borrowing are equal, the market is in equilibrium.
The loanable funds concept adds bank credit to the traditional approach, which only considered saving and investment for determining interest rates.
Due to the ability of the banking sector to generate credit out of thin air, the total quantity of credit available in an economy may exceed private savings.
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