Suppose firms become more optimistic about the economy's ability to avoid a recession and hence the expected profit increases. As a result, the demand for loanable funds curve shifts _{--------------------}and the real interest rate _{--------------------}.

Question

Quizplus · Accepted Answer

When firms are more optimistic and expect higher profits, they are likely to invest more, increasing the demand for loanable funds. This shifts the demand curve for loanable funds to the right, leading to an increase in the real interest rate due to higher demand for borrowing.

Suppose Firms Become More Optimistic About the Economy's Ability to Avoid