Sia
Question
Statistics
Posted 9 months ago
The government of Noobistan has introduced a new pension program that guarantees every retired citizen a minimum income. As a result, citizens are saving less for retirement.
Which of the following best describes the impact of this statement on the market for loanable funds?
Choose 1 answer:
(A) Less savings means that the supply of loanable funds increases and the demand for loanable funds increases, which has an indeterminate effect on interest rates.
B Less savings means that the demand for loanable funds increases, increasing the interest rate.
(C) Less savings means that the demand for loanable funds decreases, decreasing the interest rate.
(D) Less savings means that the supply of loanable funds decreases, increasing the interest rate.
(E) Less savings means that the supply of loanable funds increases, decreasing the interest rate.
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Answer from Sia
Posted 9 months ago
Solution by Steps
step 1
Understand the economic principle that savings in an economy contribute to the supply of loanable funds
step 2
Recognize that a decrease in savings due to the new pension program means that there is less money being set aside by citizens, which reduces the supply of loanable funds in the market
step 3
Apply the principle that when the supply of a good (in this case, loanable funds) decreases, and the demand remains constant, the price of the good (interest rate) tends to increase
Answer
D
Key Concept
Supply and Demand in Loanable Funds Market
Explanation
When the supply of loanable funds decreases due to lower savings, the interest rate is expected to increase, assuming demand remains constant.
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