Final answer:
The liquidity preference theory supports upward sloping yield curves. A rise in the supply of loanable funds leads to an increase in loans and a potential decrease in interest rates. Indifference curves represent consumer preferences, with the marginal rate of substitution showing the rate of trade between two goods to maintain utility.
Step-by-step explanation:
The liquidity preference theory supports upward sloping yield curves. According to this theory, investors demand a higher interest rate or yield for longer-term investments compared to shorter-term ones, due to the increased risks associated with time, such as interest rate risk, inflation, and uncertainty. Therefore, the longer the maturity of the investment, the higher the yield will tend to be, leading to an upward sloping yield curve.
A rise in supply of loanable funds in the financial market leads to an increase in the quantity of loans made and received. This increased supply is likely to also result in lower interest rates, since there is more capital available for borrowing. Conversely, a rise in demand for loanable funds without a corresponding increase in supply would lead to higher interest rates.
Indifference curves display consumer preferences and the trade-offs they are willing to make between two goods, maintaining the same level of utility. Each point on an indifference curve indicates a combination of two goods that provide the same level of satisfaction to the consumer. Hence, the concepts of downward sloping, convex indifference curves, and the marginal rate of substitution illustrate the rate at which a consumer trades one good for another, maintaining the same utility level.