The loanable funds market is currently in equilibrium. An increase in household savings will affect the loanable funds market in which of the following ways?

Question

BlackTom AI · Accepted Answer

The question asks how the loanable funds market responds to an increase in household savings when the market is in equilibrium.
Option 1: 'There will be a shortage of funds and the real interest rate will decrease.' A shortage would occur if the demand for loanable funds exceeded supply. However, an increase in savings would shift the supply curve to the right, not the demand curve, so this option misidentifies the direction of the shift and the resulting shortage scenario.
Option 2: 'The supply of loanable funds will increase and the real interest rate will decrease.' This is consistent with standard loanable funds theory: higher saving adds to the pool of funds available for lending, shifting the supply curve to the right. With more funds available, the equilibrium real interest rate falls, assuming other factors remain constant.
Option 3: 'There will be a surplus of funds and the real interest rate will increase.' A surplus of loanable funds would occur if supply shifted right but the resulting rate rose, which contradicts how increased supply typically lowers the price (interest rate) in a supply-demand framework. This option confuses the price mechanism and misstates the effect on the rate.
Option 4: 'The demand for loanable funds will increase and the real interest rate will increase.' An increase in savings does not directly increase the demand for funds; it increases supply. If anything, higher supply would tend to lower the rate, not raise it, so this option misattributes the effect to the demand side and expects an opposing rate movement.
In summary, the most coherent outcome given a rise in household saving is a rightward shift of the loanable funds supply curve, leading to a lower real interest rate, which aligns with Option 2.

The loanable funds market is currently in equilibrium. An increase in household savings will affect the loanable funds market in which of the following ways?单项选择题

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