Question

It is argued that one of the weaknesses of the loanable funds Not yet answered approach is that a final equilibrium interest rate cannot be Marked out of 1.00 determined. Which of the following statements supports this Flag question argument? Select one:

a. An equilibrium interest rate will affect savings at that level, which will affect the loanable funds demand curve.
b. Dishoarding of loanable funds will continue for successive periods.
c. In the loanable funds approach, the supply and demand curves are interdependent.
d. Changes in the money supply in one period need to be matched in ensuing periods.

Answer 1

The difficulty in determining a final equilibrium interest rate in the loanable funds approach is due to the interdependence of supply and demand curves and the influence of monetary policy practices.

The argument that a final equilibrium interest rate cannot be determined in the loanable funds approach is supported by the statement that in the loanable funds approach, the supply and demand curves are interdependent. This interdependence suggests that changes in the savings rate, influenced by the interest rate, can affect the demand for loanable funds, leading to a continuous shift in both curves and a difficulty in pinpointing a final equilibrium interest rate. Additionally, factors like monetary policy practices can also affect the supply of loanable funds, further complicating the establishment of a stable equilibrium.