Question

Automobile manufacturers are planning to adopt a new technology that will increase their overall productivity by 30%. As a result, equilibrium investment will __________ and the equilibrium interest rate will __________ in the loanable funds market.

Choose one:
A. decrease; increase
B. decrease; decrease
C. increase; increase
D. increase; decrease

Answer 1

The correct answer is option C.

Step-by-step explanation:

A new technology that increases productivity by 30% will need more investment. This causes the overall equilibrium investment to increase. This need for investment will cause the investment demand curve to shift to the right.

This rightward shift in the investment demand curve will cause the equilibrium interest rate to increase. So the equilibrium interest rate in the loanable funds market will increase.