If the real interest rate is below the equilibrium real interest rate,
A) borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will rise.
B) borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will fall.
C) lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will fall.
D) lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will rise.

Question

Quizplus · Accepted Answer

If the real interest rate is below the equilibrium real interest rate, then borrowers would want to borrow more funds than lenders are willing to lend, which creates excess demand for loanable funds. This excess demand will lead to an increase in the real interest rate until it reaches the equilibrium level where the quantity of loanable funds supplied equals the quantity of loanable funds demanded. Therefore, option A is the correct choice.

If the Real Interest Rate Is Below the Equilibrium Real