The demand curve in the loanable funds model is downward sloping because, as interest rates increase, the cost of borrowing also rises. This higher cost makes loans less attractive to borrowers. Consequently, fewer businesses and individuals are willing to take out loans, leading to a decrease in the quantity of loanable funds demanded. Conversely, when interest rates are low, borrowing becomes cheaper, prompting more consumers and businesses to seek loans, which increases the quantity demanded. Thus, the inverse relationship between interest rates and the quantity of loanable funds demanded results in a downward sloping demand curve.
On the other hand, the supply curve is upward sloping because as interest rates rise, saving becomes more attractive. Higher interest rates incentivize individuals and institutions to save more money, as they can earn more on their savings. This increase in saving leads to a greater quantity of loanable funds available for lending. Therefore, as interest rates increase, the quantity of loanable funds supplied also increases, resulting in an upward sloping supply curve. In summary, the downward sloping demand curve reflects the reduction in demand for loans as borrowing costs rise, while the upward sloping supply curve illustrates the increased willingness to save and supply funds at higher interest rates.