What happens when there is a shortage of loanable funds?

When there is a shortage of loanable funds, it means that the demand for loans exceeds the available supply of funds that lenders are willing to provide. This can lead to higher interest rates, as borrowers compete for a limited amount of capital. Consequently, businesses and individuals may face difficulties obtaining financing, which can hinder investment and economic growth. Additionally, this situation can lead to tighter credit conditions, affecting consumer spending and overall economic activity.