Question

If saving exceeds investment demand, and consumption is not a function of the interest rate: a. the demand for loans exceeds the supply of loans. b. the interest rate will rise. c. saving will fall. d. the interest rate will fall.

Answer 1

The correct answer is letter "D": the interest rate will fall.

Step-by-step explanation:

If in a certain economy savings are greater than investments, the interest rate will fall. This is the result of individuals' reduced needs to request loans whether for consumption or investment. The situation is reinforced if consumption is not a factor for changes in the interest rate. Banks will be pushed to lower the interest rate to promote borrowings, thus, reducing the savings gradually.

Answer 2

d. the interest rate will fall.

Explanation:

If the number of people that save money is more than the number of people that demand for investment, then production rate will reduce, and if investment demand is more than savings, production will increase. And if there is an increase in interest rate, consumption rate will fall because spending on consumption will be more expensive and consumer will prefer to save for higher interest rate.

Therefore in situations where there is an increase in saving and the interest rate does not affect the consumption rate, there will be a fall in the interest rate.