If the real interest rate increases from 3 percent to 5 percent,
A) the supply of loanable funds curve will shift rightward.
B) the demand for loanable funds curve will shift rightward.
C) the nominal interest rate will also increase.
D) there will be a movement up along the demand for loanable funds curve.

Question

Quizplus · Accepted Answer

An increase in the real interest rate causes a movement up along the demand for loanable funds curve, as borrowers are willing to pay a higher interest rate for loans. Choices A and B are incorrect because a change in the real interest rate does not directly affect the supply or demand for loanable funds. Choice C is incorrect because a change in the real interest rate does not necessarily result in a corresponding change in the nominal interest rate, which includes the effect of inflation.

If the Real Interest Rate Increases from 3 Percent to 5