Question

If there is a surplus in the market for loanable funds, the resulting change in the real interest rate a. raises the quantity of loanable funds supplied and reduces the quantity of loanable funds demanded. b. reduces the quantity of loanable funds supplied and raises the quantity of loanable funds demanded c. raises both the quantity of loanable funds supplied and the quantity of loanable funds demanded. d. reduces both the quantity of loanable funds supplied and the quantity of loanable funds demanded.

Answer 1

The correct answer is option b.

Step-by-step explanation:

A surplus in the market for loanable funds is likely to cause a fall in the interest rate. At lower interest rate, people who need credit will demand more loanable funds. While the suppliers will provide less funds. So, the demand of loanable funds will increase and the supply will decrease.

This process will continue till excess demand will cause the interest rate to rise. The initial equilibrium will be restored eventually.