The demand for loanable funds curve slopes downward because the
A) expected rate of profit is related positively to the real interest rate.
B) higher the real interest rate, the lower the cost of investment.
C) expected rate of profit is factor that "rewards" firms for their investment.
D) real interest rate is the opportunity cost of investment.
E) price of bonds and stocks is not related to the real interest rate.

Question

Quizplus · Accepted Answer

The demand for loanable funds curve slopes downward because a higher real interest rate increases the cost of borrowing, which in turn reduces the quantity of loanable funds demanded for investments. The real interest rate is essentially the opportunity cost of investment, meaning that as it rises, fewer investments are deemed profitable, leading to a decrease in demand for loanable funds.

The Demand for Loanable Funds Curve Slopes Downward Because the