Suppose the market for loanable funds is in equilibrium.If expected profit falls, the equilibrium real interest rate _______ and the equilibrium quantity of loanable funds _______.
A)falls; decreases
B)rises; increases
C)falls; increases
D)rises; decreases
E)falls; increases or decreases but we don't know for sure

Question

Quizplus · Accepted Answer

If expected profit falls, the demand for loanable funds (by firms and investors) will decrease, leading to a surplus in the market. In order to get rid of the surplus, interest rates must fall to incentivize borrowers to take out more loans and lenders to supply more funds. This decrease in interest rates will result in a decrease in the equilibrium quantity of loanable funds, as lenders will be less willing to supply at lower rates.

Suppose the Market for Loanable Funds Is in Equilibrium