The figure above shows the loanable funds market.
- If the real interest rate is 10 percent, then

Question

Quizplus · Accepted Answer

The real interest rate is the nominal interest rate minus the inflation rate. If the real interest rate is 10 percent, then the nominal interest rate must be greater than 10 percent. This is because the inflation rate is always positive, so the nominal interest rate must be greater than the real interest rate in order to compensate savers for the loss of purchasing power due to inflation.A shortage in the loanable funds market occurs when the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied. This can happen when the real interest rate is too low. When the real interest rate is too low, borrowers are encouraged to borrow more money, while savers are discouraged from saving money. This leads to a shortage in the loanable funds market.

The Figure Above Shows the Loanable Funds Market