Question

For an imaginary economy, when the real interest rate is 7 percent, the quantity of loanable funds demanded is $500 and the quantity of loanable funds supplied is $500. Currently, the nominal interest rate is 9 percent and the inflation rate is 4 percent. Currently,

A. the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will rise.

B. the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will fall.

C. the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, and as a result the real interest rate will rise.

D. the market for loanable funds is in equilibrium.

Answer 1

The correct answer is option (C) the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, and as a result the real interest rate will rise.

Step-by-step explanation:

Solution

At the interest rate of 7% the market Is in equilibrium where the supply and the demand are same, at a higher rate this the supply will rise for example, the saving will go up and demand will be lower than the supply. But as the inflation rate is 4% then the real interest rate is only 5%.

At a rate below the equilibrium the demand will be more than the supply and there will be a shortage that will increase the real s interest rate.