What changes will a shortage of loanable funds induce in a savings-investment diagram in a closed economy?
A) The demand for loanable funds curve will shift right, so the interest rate will rise.
B) The supply of loanable funds curve will shift left, so the interest rate will fall.
C) There will be no shifts of the curves, but the interest rate will rise.
D) There will be no shifts of the curves, but the interest rate will fall.

Question

Quizplus · Accepted Answer

A shortage of loanable funds, without specifying a cause such as a change in savings behavior or investment demand, typically leads to an increase in the interest rate due to higher demand or lower supply at the existing interest rate. This does not necessarily imply a shift in the supply or demand curves themselves but rather a movement along the curves to a new equilibrium point with a higher interest rate.

What Changes Will a Shortage of Loanable Funds Induce in a Savings-Investment