The Loanable Funds Theory explains how the market for loans operates, focusing on the supply and demand for funds. It suggests that the interest rate is determined by the interaction between savers, who supply funds, and borrowers, who demand funds. When savings increase, the supply of loanable funds rises, leading to lower interest rates, which encourages more borrowing. Conversely, if borrowing demand increases without a corresponding rise in savings, interest rates will rise. This theory helps to understand how changes in economic conditions, such as government policies or consumer confidence, can impact the availability and cost of loans in the economy.