The supply of loanable funds curve is upward-sloping because a rise in the interest rate
A) decreases the opportunity cost of firms' investment spending
B) stimulates the economy
C) decreases the opportunity cost to households of consuming
D) increases the opportunity cost to households of consuming
E) increases the government's desire to run a budget deficit

Question

Quizplus · Accepted Answer

The supply of loanable funds comes from savings, and a rise in interest rate increases the opportunity cost of consuming for households, encouraging them to save more and supply more loanable funds. Therefore, the supply curve is upward-sloping. A decrease in interest rates reduces the opportunity cost of consuming, discouraging saving and reducing the supply of loanable funds.

The Supply of Loanable Funds Curve Is Upward-Sloping Because a Rise