Suppose that while households are deciding to increase savings, the demand by firms for investment funds falls. In the market for loanable funds, the real interest rate will _____ and the quantity of loanable funds will _____.
A) rise; fall
B) rise; rise
C) fall; rise, fall, or stay the same
D) rise, fall, or stay the same; rise

Question

Quizplus · Accepted Answer

When households increase savings, the supply of loanable funds will increase, causing the equilibrium interest rate to fall. At the same time, the decrease in demand for investment funds by firms will cause the demand for loanable funds to fall. The net effect on the quantity of loanable funds is uncertain, as it depends on the magnitude of the changes in supply and demand. Therefore, the quantity of loanable funds could rise, fall, or stay the same.

Suppose That While Households Are Deciding to Increase Savings, the Demand