In both cases, the interest rate plays a major role in whether or not businesses undertake the expenditure. Therefore, the demand for loanable funds by businesses is downward sloping and very sensitive to interest rate changes. Governments are also big users of loanable funds, but the federal government is a bigger user than are the state and local governments. Government spending depends primarily upon social needs, and since governments can raise taxes to pay off their loans, government spending is not sensitive to changes in the interest rates. Therefore, the demand for loanable funds by governments tends to be fixed and unresponsive to interest rate changes.
Foreigners can be big users of funds, depending upon interest rates in other countries.
Therefore, the demand for loanable funds by foreigners is downward sloping and very sensitive to interest rate changes. The equilibrium rate of interest is the rate of interest at which the demand for loanable funds equals the supply of loanable funds. At this rate the amount of loanable funds made available by households, businesses, governments, foreigners, banks, and the central bank are exactly the amount of loanable funds that households, businesses, governments, and foreigners need. There is no excess demand and no excess supply of loanable funds. Therefore, it is the rate of interest which clears the market.