Refer to the figure below to answer the following questions.

Figure 23.2.4
-Refer to Figure 23.2.4.In Figure 23.2.4,the economy is at point A on the supply of loanable funds curve SLF?.What happens if the real interest rate rises?

Question

Refer to the figure below to answer the following questions.
  
Figure 23.2.4
-Refer to Figure 23.2.4.In Figure 23.2.4,the economy is at point A on the supply of loanable funds curve SLF?.What happens if the real interest rate rises?

Quizplus · Accepted Answer

When the real interest rate rises, households and firms tend to save more since the opportunity cost of consuming today instead of saving and earning a higher return in the future has increased. This leads to a movement along the supply of loanable funds curve from point A to a new point such as B, where the supply of loanable funds has increased leading to a new equilibrium with a higher real interest rate. The supply of loanable funds curve does not shift in this case.

Refer to the Figure Below to Answer the Following Questions