As the real interest rate in the domestic loanable funds market increases,
A) the cost of purchasing goods and services during the current period will decrease.
B) the net inflow of capital from abroad will increase.
C) the inflationary premium will rise and the money rate of interest will decline.
D) a trade surplus will occur.

Question

Quizplus · Accepted Answer

An increase in the real interest rate in the domestic loanable funds market will make domestic assets more attractive to foreign investors, which will result in a net inflow of capital from abroad. This will increase the supply of loanable funds in the domestic market, which will cause the interest rate to decrease. Choice A is incorrect because an increase in real interest rate would make borrowing more expensive, causing a decrease in spending, leading to a decrease in demand for goods and services. Choice C is incorrect because an increase in inflationary premium would lead to an increase in the money rate of interest, not a decline. Choice D is incorrect because there is no direct relationship between a real interest rate increase and a trade surplus.

As the Real Interest Rate in the Domestic Loanable Funds