Question

Suppose the market for loanable funds is in equilibrium. what would happen in the market for loanable funds other things the same, if the congress and president increased the maximum contribution limits to 401 (k) and 403(b) tax-deferred retirement accounts? a. the interest rate and quantity of loanable funds would increase. b. the interest rate and quantity of loanable funds would decrease. c. the interest rate would increase and the quantity of loanable funds would decrease. d. the interest rate would decrease and the quantity of loanable funds would increase.

Answer 1

D) the interest rate would decrease and the quantity of loanable funds would increase.

Step-by-step explanation:

If the maximum contribution limits to tax-deferred retirement accounts increase, we could expect an increase in total national savings. This would increase the total amount of loanable funds which in turn would decrease the interest rates.

In the market for money, your suppliers are those households or companies that have excess amount of cash saved and are willing to loan it to individuals or companies that need that money to purchase goods or invest. The price of money is determined by the equilibrium interest rate.

In this case, the supply of money would increase and the price of money (interest rate) would decrease.