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Question
Microeconomics
Posted 5 months ago
Citizens in Fredland are saving more.
Which of the following best describes the impact of this statement on the market for loanable funds?
Choose 1 answer:
(A) The supply of loanable funds decreases and the real interest rate increases.
(B) The supply of loanable funds increases and the real interest rate decreases.
(C) The demand for loanable funds decreases and the real interest rate decreases.
(D) The demand for loanable funds increases and the real interest rate increases.
(E) The demand for loanable funds decreases and the supply of loanable funds decreases and the effect on the interest rate is indeterminate.
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Answer from Sia
Posted 5 months ago
Solution
a
Supply of Loanable Funds: When citizens save more, the supply of loanable funds increases
b
Real Interest Rate: An increase in the supply of loanable funds typically leads to a decrease in the real interest rate
Answer
(B) The supply of loanable funds increases and the real interest rate decreases.
Key Concept
Supply and Demand in Loanable Funds Market
Explanation
When citizens save more, the supply of loanable funds increases. This increased supply leads to a decrease in the real interest rate, as there is more money available for borrowing.
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