Question

does each of the following affect either the supply or the demand for loanable funds, and if so, does the affected curve increase (shift to the right) or decrease (shift to the left)? a. there is an increase in capital inflows into the economy. b. businesses are pessimistic about future business conditions. c. the government increases borrowing. d. the private savings rate decreases.

Answer 1

An increase in capital inflows into the economy increases the supply of loanable funds, while businesses being pessimistic, government borrowing, and a decrease in private savings rate all decrease the demand or supply of loanable funds.

Step-by-step explanation:

a. An increase in capital inflows into the economy affects the supply of loanable funds. It increases the supply of funds, shifting the supply curve to the right. This implies that the availability of funds for borrowing increases, leading to lower interest rates and higher quantity of loans made and received.

b. When businesses are pessimistic about future business conditions, it affects the demand for loanable funds. It decreases the demand for funds, shifting the demand curve to the left. This results in higher interest rates and a decrease in the quantity of loans made and received.

c. When the government increases borrowing, it affects the demand for loanable funds. It increases the demand for funds, shifting the demand curve to the right. This leads to higher interest rates and a higher quantity of loans made and received.

d. A decrease in the private savings rate affects the supply of loanable funds. It decreases the supply of funds, shifting the supply curve to the left. This causes higher interest rates and a decrease in the quantity of loans made and received.