Question

In the market for loanable funds, a lower real interest rate will lead to:

A. a decrease in the supply of loanable funds.
B. a decrease in the demand for loanable funds.
C. an increase in the supply of loanable funds.
D. an increase in the demand for loanable funds.
E. both B and C are correct
F. both A and D are correct

Answer 1

The correct answer is option F.

Step-by-step explanation:

In the market for loanable funds, the equilibrium interest rate is determined by the demand for loanable funds and the supply of loanable funds.

At lower real interest rates, the demand for loanable funds will be higher as borrowing will be cheaper. So at lower interest rate demand for loanable funds will increase.

At the same time, at a lower interest, the supply of loanable funds will be lower as the reward for lending i.e interest rate will be lower. So at lower interest rates, the supply of loanable funds will decrease.