Suppose the real interest rate rises and the quantity of loanable funds decreases. These changes could have been the result of
A) firms expecting higher future profits.
B) an increase in household wealth.
C) a decrease in the default risk.
D) an increase in disposable income.

Question

Quizplus · Accepted Answer

An increase in the real interest rate and a decrease in the quantity of loanable funds are both signs of a decreased supply of loanable funds. This implies that either households are saving less or firms are investing more. Of the given options, only an increase in household wealth could potentially lead to a decrease in the supply of loanable funds, as individuals may feel more financially secure and choose to save less. However, none of the other options provided would affect the supply of loanable funds directly.

Suppose the Real Interest Rate Rises and the Quantity of Loanable