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The slope of the demand for loanable funds curve represents the...

a. positive relation between the real interest rate and saving.

b. negative relation between the real interest rate and investment.

c. negative relation between the real interest rate and saving.

d. positive relation between the real interest rate and investment.

2 Answers

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Final answer:

The slope of the demand for loanable funds curve represents the negative relation between the real interest rate and investment. This demonstrates how interest rates affect investment demand. The elasticity of savings and its effect on the supply of financial capital also correlates with interest rates.

Step-by-step explanation:

The slope of the demand for loanable funds curve represents the negative relation between the real interest rate and investment. This means that as interest rates increase, the quantity of loanable funds demanded for investment purposes decreases, and vice versa. This relationship reflects the cost of borrowing; higher interest rates make loans more expensive, thus decreasing the demand for investment, while lower rates make loans cheaper, increasing investment demand.

In contrast, the slope of the savings function represents the positive relation between the real interest rate and saving, which indicates that higher interest rates encourage more saving as the return on saved funds increases. The elasticity of savings describes the degree to which changes in interest rates affect the quantity of saving, influencing the shape of the supply curve for financial capital in financial markets.

User RMPR
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Answer: c. negative relation between the real interest rate and saving.

Explanation: Savings belong to what an economy saves from its income, which in turn represents national savings. We also have the investment and the net capital flow. The balance is reached when the amount of savings equals investment and net capital flows or demand for loanable flows.

Therefore, we can say that the demand is negative when interest rates rise, since this retracts the economy and decreases the savings and thus the money available to lend.

User Mouad Slimane
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