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

Question

Quizplus · Accepted Answer

If firms become more optimistic about the economy, they will likely increase their investment and borrowing, causing an increase in the demand for loanable funds. This shift will cause the demand for loanable funds curve to shift rightward. With the increase in demand for loanable funds, the real interest rate will rise as lenders would want to charge higher rates to lend their funds to the borrowers who are now more optimistic and hence less risky. Therefore, the correct answer is D- rightward shift in the demand for loanable funds curve and rising real interest rates.

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