I’m going to explain this from the beginning.
In an ideal world where prices adjust perfectly to increases in the money supply, the supply of loanable funds would not be changed by an increase in the money supply, cetereic paribus. Neither would the demand for loanable funds. We do not live an ideal world. CERTAIN prices take time to adjust while others don’t. The prices of auction-syle assets (bonds, stocks, etc.) change immediately to changes in the supply of money. Standard consumer goods prices don’t respond immediately.
Say the Fed increases the supply of money. The asymmetry in price sensitivity between different goods creates a change in relative prices between investment goods and consumption goods. Investment goods are now more valuable compared to investment goods. The demand for loanable funds increases. In other words, the demand curve for loanable funds shifts to the right. At the same time, the supply of loanable funds increases because of the failure of some prices to respond to the increase in the money supply. In other words, the supply curve of loanable funds shifts to the right. BOTH CURVES SHIFT. The change in the interest rate depends on which curve shifts more.
Time enters the picture in the form of the different rates at which consumer and investment good prices change in response to the money supply increase. Investment good prices respond immediately while consumer good prices can take a year or more to fully adjust. It doesn’t matter how the new money enters the system. There is no distortion if the increase in the money supply occurs during an offsetting increase in the demand for money. Resources used to produce comsumer goods become unempoyed after the increase in the demand for money but are then reemployed in the production of investment goods after the money supply increase. This is exactly what would happen in the ideal world I mentioned where prices adjust perfectly, only the nominal increase in the money supply wouldn’t be necessary.
Also, don’t patronize me by saying the “mainstream” economists don’t take this or that into consideration. I was introduced to economics through the Mises Institute and I attended the 2008 Mises University. I even participated in the Mundliche Prufung. I’ve read Garrison’s book, I’ve read Human Action, I’ve read countless Mises Institute articles. I currently attend Mario Rizzo’s Austrian colloquium at NYU. However, as I’ve read and talked to more mainstream economists, I’ve realized they take a lot more of the Austrian insights into account than the Mises Institute economists think or care to admit.