In the saving-investment diagram, an increase in output will lead to
A)a reduction in saving and a rise in the real interest rate.
B)an increase in saving and a fall in the real interest rate.
C)a reduction in saving and a fall in the real interest rate.
D)an increase in saving and a rise in the real interest rate.

Question

Quizplus · Accepted Answer

An increase in output typically leads to an increase in saving because people have more income to save. This increase in saving shifts the supply of loanable funds to the right, reducing the equilibrium real interest rate.

In the Saving-Investment Diagram, an Increase in Output Will Lead