If the supply of loanable funds is very inelastic (steep), which policy would likely increase saving and investment the most?

Question

Quizplus · Accepted Answer

If the supply of loanable funds is very inelastic, it means that even small changes in interest rates do not have a significant impact on the quantity of loanable funds available. Therefore, using policies that affect the demand for loanable funds, such as reducing the budget deficit, would be more effective in increasing saving and investment. By reducing the budget deficit, the government is essentially reducing its demand for loanable funds, freeing up more funds for private investment and potentially increasing saving as well. Meanwhile, an increase in the budget deficit would increase the government's demand for loanable funds, potentially crowding out private investment and reducing saving. The investment tax credit may also stimulate investment, but it would not affect the supply of loanable funds directly.

If the Supply of Loanable Funds Is Very Inelastic (Steep)