Suppose the real interest rate rises and the quantity of loanable funds increases. These changes could have been the result of
A) firms expecting lower future profits.
B) firms expecting higher future profits.
C) in increase in the default risk.
D) households expecting higher future income.

Question

Quizplus · Accepted Answer

If firms expect higher future profits, they may borrow more money to invest in projects that will earn higher returns in the future. This increases the demand for loanable funds and drives up the real interest rate.

An increase in the quantity of loanable funds could happen due to an increase in savings or a decrease in consumption. If households expect higher future income, they may save more money today and this would increase the quantity of loanable funds available. However, this alone would not result in a rise in the real interest rate.

Lower future profits or an increase in default risk would decrease the demand for loanable funds, causing the real interest rate to decrease. Therefore, choices A and C are incorrect.

Suppose the Real Interest Rate Rises and the Quantity of Loanable