In the long run, an increase in the demand for investment pushes the real interest rate, encourages
Saving by households, and leads to a future growth rate of potential output.

Question

Quizplus · Accepted Answer

According to the loanable funds theory, an increase in demand for investment (an increase in investment opportunities) pushes the real interest rate up as the demand for funds increases. This increase in interest rates encourages saving by households as it offers a higher rate of return for their savings. The increase in investment and saving leads to a higher level of capital accumulation and technological progress, which ultimately increases the growth rate of potential output in the future. Therefore, the correct option is D as it states that an increase in investment demand leads to an increase in real interest rates, more savings, and higher future growth rates of potential output.

In the Long Run, an Increase in the Demand for Investment