Question

The explanation for the slope of the supply of loanable funds curve is based on the logic that a higher real interest rate leads to higher saving. What is the explanation for the slope of the supply of loanable funds curve?

1) A higher real interest rate leads to higher saving
2) A higher real interest rate leads to lower saving
3) A lower real interest rate leads to higher saving
4) A lower real interest rate leads to lower saving

Answer 1

A higher real interest rate leads to higher saving.

Step-by-step explanation:

The explanation for the slope of the supply of loanable funds curve is that a higher real interest rate leads to higher saving. The correct answer is 1) A higher real interest rate leads to higher saving.

When the real interest rate is higher, it incentivizes individuals and businesses to save more money and invest it in financial assets, such as bonds or bank deposits, which offer higher returns. This increases the supply of loanable funds in the market as more people are willing to lend their excess savings. As a result, the supply curve of loanable funds moves to the right, indicating a higher quantity of loanable funds available at each interest rate.