The slope of the supply of loanable funds curve represents the

Question

BlackTom AI · Accepted Answer

An upward-sloping supply of loanable funds curve indicates that higher interest rates induce more saving, so the slope represents the positive relation between the interest rate and saving.

1. Relevant knowledge points and concepts
- Loanable funds market: aggregate supply is the total saving available for lending; demand is investment plus borrowing.
- Interest rate: the price of loanable funds; a higher interest rate raises the return to saving.
- Supply curve slope: an upward slope means quantity supplied rises as price (interest rate) rises; mathematically S = S(r) with dS/dr > 0.
- Substitution/return effect: higher returns encourage postponing consumption and increasing saving.

2. Step-by-step reasoning
Step 1: Identify what the supply curve plots — the relationship between the interest rate (vertical axis) and quantity of loanable funds supplied (horizontal axis), which is equal to saving in the aggregate.
Step 2: Consider behavior of households: when the interest rate increases, saving yields a higher return, so households substitute future consumption for present consumption and save more.
Step 3: Aggregate this behavior: the total saving in the economy increases as the interest rate rises, so the supply curve shifts right along higher interest rates.
Step 4: Therefore, the slope of the supply curve expresses that saving and the interest rate move together positively.

3. Intermediate steps / formalization
- Represent supply as S(r). The upward slope implies dS/dr > 0.
- No numerical calculation is required; the sign of the derivative captures the relationship.

4. Why the correct answer is correct
Because the supply curve in the loanable funds market is literally the schedule of saving available at each interest rate, and higher interest rates raise the incentive to save, the slope captures a positive relationship between interest rate and saving.

5. Why other options are incorrect (brief)
- “Negative relation between interest rate and saving” is wrong: that would imply higher rates reduce saving, contrary to return incentives.
- Any option tying the slope to investment or demand confuses supply with demand; investment is the demand side and typically slopes downward.

6. Conclusion
Hence, the slope represents the positive relation between the interest rate and saving, which matches the provided answer: “positive relation between the interest rate and saving.”

The slope of the supply of loanable funds curve represents theSingle choice

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