FIGURE 15-2
-Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E₁.If the government then institutes a policy that encourages individuals to increase their desired saving,

Question

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E<sub>1</sub>.If the government then institutes a policy that encourages individuals to increase their desired saving, A) the equilibrium interest rate falls and the amount of investment increases. B) the equilibrium interest rate falls but the amount of investment is unchanged. C) the flow of investment and saving both increase in the new equilibrium,but the interest rate is unaffected. D) the flow of investment and saving both increase,and the equilibrium interest rate increases. E) the equilibrium interest rate rises,and the amount of investment decreases.

Quizplus · Accepted Answer

The policy that encourages individuals to increase their desired saving will shift the supply of loanable funds curve to the right, resulting in a new equilibrium point ES2U2B21S2U2B2 with a lower interest rate and a higher amount of investment. This is because the increased saving leads to more funds available for investment, driving down the cost of borrowing (interest rate) and increasing the quantity of investment.

FIGURE 15-2 -Refer to Figure 15-2.The Market for Financial Capital Is Initially