Sia
Question
Statistics
Posted 5 months ago
People in Hamsterville are looking forward to a long, fun-filled retirement and are saving more money to make sure they can go on trips around the world when they retire.
What happens to the interest rate and long-run aggregate supply (LRAS) as a result of what happens to the interest rate?
Choose 1 answer:
(A) Interest rate decreases; LRAS increases
(B) Interest rate increases; LRAS increases
(c) Interest rate increases; LRAS decreases
(D) Interest rate decreases; LRAS is unaffected
(E) Interest rate doesn't change; LRAS doesn't change
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Answer from Sia
Posted 5 months ago
Solution by Steps
step 1
To understand the impact of increased savings on the interest rate, we consider the supply and demand model for loanable funds. An increase in savings shifts the supply curve for loanable funds to the right
step 2
According to the law of demand, an increase in the supply of loanable funds, with demand remaining constant, leads to a decrease in the equilibrium interest rate
step 3
A decrease in the interest rate reduces the cost of borrowing, which can encourage investment and potentially increase the long-run aggregate supply (LRAS) as the economy's productive capacity expands
Answer
A
Key Concept
Loanable Funds Market and LRAS
Explanation
Increased savings lead to a higher supply of loanable funds, which decreases the interest rate and can increase the long-run aggregate supply as investment becomes more attractive.
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