Please answer the given four questions related to the market for loanable funds.

1. What effect will an increase in interest rates have on the quantity of loanable funds supplied?
a. Some lenders will offer more whereas others offer less.
b. There will be no change in quantity supplied.
c. Quantity supplied will decrease.
d. Quantity supplied will increase.

2. As interest rate decreases, what happens to the quantity of loanable funds demanded?
a. Some borrowers will demand more funds whereas others will demand less.
b. Quantity demanded will decrease.
c. Quantity demanded will increase.
d. There will be no change in quantity demanded.

3. Which of the terms acts as the "price" in the market for loanable funds?
a. interest rate
b. demand
c. capital
d. supply

4. If the projected rate of return for a project is less than the interest rate for a loan that is necessary to complete the project, how will the borrowing business act?
a. The business will proceed anyway, knowing that the return is only an estimate.
b. The business will not take out the loan.
c. The business will demand more funds to cover the shortfall.
d. The business will take out the loan.

The interest rate (specifically the real interest rate) is the factor through which balance is achieved between quantity supplied and quantity demanded in the loanable funds market, and thus it acts as the "price" in this market. Producers of loanable funds (lending institutions) and consumers (borrowers) will adjust their quantities supplied and demanded, respectively, to the prevailing real interest rate in the market. At any given rate, an equilibrium quantity will be established.

As with a traditional supply and demand curve, as the interest rate decreases, the quantity of loanable funds demanded increases. At lower interest rates, more individuals will seek out loanable funds. The key consideration for any consumer in the loanable funds market is how likely he or she is to receive a rate of return equal to or greater than the interest rate. As the interest rate drops, the likelihood of earning a rate of return at least as high as the interest rate increases, and more individuals will request funds.

If a business is unable to secure a rate of return at least as high as the interest rate, it will not desire financing because the outcome would be an overall loss of money. When the rate of return is at least equal to the interest rate, a company will break even. If it is greater, they will make money from the venture. No business will take out a loan with an interest rate higher than the projected rate of return because this would likely put it farther into debt than before, with no net benefit. Businesses will only borrow when the rate of return is projected to be higher than the interest rate.

As the interest rate increases, the quantity supplied of loanable funds increases. Lenders have a higher incentive to supply funds because with a higher interest rate, a greater return on their investment is possible. However, this is no guarantee that lenders will, in fact, earn more, because as the interest rate increases, there is a corresponding decrease in the quantity of loanable funds demanded.