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 become more optimistic about the economy, they are more likely to invest in new projects and expand their business, which increases the demand for loanable funds. This leads to a rightward shift of the demand for loanable funds curve. At the same time, the increase in demand for funds puts upward pressure on the real interest rate, which rises as a result. Therefore, the correct answer is A: rightward shift of the demand for loanable funds curve and a rise in the real interest rate.

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