The supply of loanable funds curve is _____ sloping because _____ respond to lower interest rates by _____ their quantity supplied of loanable funds.

Question

BlackTom AI · Accepted Answer

First, restating the question and options to set the stage: The supply of loanable funds curve is _____ sloping because _____ respond to lower interest rates by _____ their quantity supplied of loanable funds.

Option a: 'upward; savers; increasing' — This option says the curve is upward sloping and that savers respond to lower interest rates by increasing their quantity supplied. While an upward-sloping supply curve is true, the claim that savers increase supply when rates fall is incorrect. In economics, a fall in interest rates reduces the incentive for savers, so they would typically supply less, not more, loanable funds.

Option b: 'upward; savers; decreasing' — This choice asserts an upward-sloping supply curve, which matches the standard interpretation that higher rates induce more saving, hence more loanable funds supplied. It also correctly states that savers respond to lower rates by decreasing the quantity supplied of loanable funds. Put differently, when rates drop, savers reduce their saving activity, leading to a smaller quantity of funds supplied. This aligns with the intuition that savers are the source of loanable funds and their willingness to supply funds falls as returns fall.

Option c: 'downward; savers; increasing' — A downward-sloping supply curve would imply that higher rates would lead to less supply, or that lower rates would increase supply, which contradicts standard supply behavior. Additionally, stating that savers increase supply when rates fall contradicts the typical incentive structure for savers.

Option d: 'upward; investors; decreasing' — While the curve being upward sloping is acceptable, identifying 'investors' as the suppliers of loanable funds is inaccurate. In the loanable funds market, savers supply funds, and borrowers demand them; investors are not the primary suppliers of loanable funds. Therefore this option mislabels the source of funds and mixes up roles.

In summary, option b is the only choice that correctly characterizes both the direction of the supply curve (upward) and the behavior of the relevant side (savers) in response to changes in interest rates (decreasing quantity supplied when rates fall). The other options contain at least one conceptual error: incorrect slope reasoning, misidentifying the supplier group, or inconsistent incentive logic.

The supply of loanable funds curve is ___ sloping because _ respond to lower interest rates by ___ their quantity supplied of loanable funds.Single choice

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A decrease in household savings due to higher consumer spending will generally cause a _ the _for loanable funds.[Fill in the blank]

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The figure above shows the loanable funds market. The equilibrium real interest rate is , and the equilibrium quantity of loanable funds is .

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The supply of loanable funds curve is _____ sloping because _____ respond to lower interest rates by _____ their quantity supplied of loanable funds.Single choice