Does an increase in money demand lead to an increase in demand for loanable funds? If so, what is the mechanism behind the change?
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$\begingroup$ is this homework? $\endgroup$– DayneCommented Mar 30, 2022 at 9:46
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$\begingroup$ Nope, it's on the ppt slides that money demand lead to an increase in demand for loanable funds but the diagrams and mechanism behind are not shown so I was wondering why such changes take place $\endgroup$– antifreezeCommented Mar 30, 2022 at 9:54
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Yes, it does. Loanable funds are all form of credit, which are in essence subset of all money (taking the broad view of money), so if the general demand for money increases, without any further assumptions, demand for loanable funds increases. In fact in fiat money system bank credit creation equals money creation, $\Delta B=\Delta M$, where $M$ is money and $B$ credit, so you will often see even some 101 textbook models treating demand for money and credit interchangeably.
A consequence of $\Delta B=\Delta M$ is that higher demand for money translates in essence to higher demand for credit (i.e. loanable funds) and vice versa.
answered Mar 30, 2022 at 10:07