Question

The graph characterizes a market for loanable funds. Shift the appropriate curves to indicate what will happen to the market if there is an improvement in the technology firms use in production.

After this change,
a. the real interest rate increases and the quantity of loanable funds decreases.
b. the real interest rate decreases and the quantity of loanable funds increases.
c. the real interest rate increases and the quantity of loanable funds increases.
d. the real interest rate decreases and the quantity of loanable funds decreases.

Answer 1

c. the real interest rate increases and the quantity of loanable funds increases.

Step-by-step explanation:

If there is improvement in the technology firms use in production then they need money. So they borrow more, because of this borrowing the demand curve will shift right.

As the demand curve shifts right it is clearly visible that from y-axis the real interest rate increases as the equilibrium shifts right due to shift in demand curve. From x-axis it is clear that quantity of loanable funds increases.

In the market here, there is an improvement in the technology firms use in production. In response to this change, borrowers will want to borrow more money at all interest rates. Firms have a greater incentive to borrow money because doing so has become more profitable. The change here should be modeled as an increase in demand for loanable funds.

To determine the impact on the interest rate and equilibrium quantity of loanable funds, identify the new intersection of the supply and demand curves. An increase in demand for loanable funds causes both the real interest rate and the equilibrium of loanable funds to rise.