Due to expectations of lower inflation in the future, we would typically expect the supply of loanable funds to ____ and the demand for loanable funds to ____.
A)increase; decrease
B)increase; increase
C)decrease; increase
D)decrease; decrease

Question

Quizplus · Accepted Answer

Lower inflation expectations mean that people anticipate lower future prices for goods and services. This means that the real interest rate (i.e. the nominal rate adjusted for inflation) that investors and savers demand for lending out their funds should decrease, making loans more affordable. As a result, the supply of loanable funds will increase as savers will be more willing to lend at lower real interest rates. Meanwhile, the demand for loanable funds decreases because borrowing becomes cheaper, so investors will wish to borrow more to finance their investments.

Due to Expectations of Lower Inflation in the Future, We