In the market for loanable funds,an increase in the interest rate leads to _____ if the income effect dominates the substitution effect.

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When the interest rate increases, it becomes more expensive for borrowers to borrow money, leading to a decrease in the quantity demanded for loanable funds. This is known as the substitution effect. However, the income effect, in which higher interest rates lead to an increase in savings, may be offset by the substitution effect. Therefore, if the income effect does not dominate and the substitution effect does, an increase in the interest rate will lead to a decrease in supply of loanable funds as households and firms shift towards saving more and borrowing less. This is because at a higher interest rate, lenders are willing to lend more but borrowers are willing to borrow less, leading to an overall decrease in the quantity of loanable funds supplied.

In the Market for Loanable Funds,an Increase in the Interest