The quantity of loanable funds demanded increases if the real interest rate falls, all other things remaining the same, because the real interest rate
A) determines the cost of living.
B) is the opportunity cost of investment.
C) affects the quantity of saving supplied.
D) is not related to the price of bonds and stocks.
E) affects the supply of saving which, in turn, determines the quantity of investment.

Question

Quizplus · Accepted Answer

The real interest rate is the opportunity cost of investment, meaning that it is the cost of forgoing consumption today in order to invest and receive a return in the future. When the real interest rate falls, the cost of investment decreases and so the quantity of loanable funds demanded increases as more people are willing to invest at this lower cost. Options A, C, D, and E are not correct because they are either unrelated or do not provide an accurate explanation for why the quantity of loanable funds demanded increases when the real interest rate falls.

The Quantity of Loanable Funds Demanded Increases If the Real