Final answer:
If the United States is viewed as a riskier economy, resulting in fewer foreign investments, the loanable funds theory suggests there will be a higher real interest rate due to a leftward shift in the supply curve of financial capital leading to a new equilibrium with a lower quantity of investment. The correct option is A.
Step-by-step explanation:
When considering the scenario where the United States is perceived as a more risky economy leading to a decrease in foreign investments in U.S. financial assets, using the loanable funds theory can help us understand the expected outcomes.
The loanable funds theory is a concept in economics that describes the market where borrowers and lenders interact, with the real interest rate being determined by the supply of and demand for loanable funds. In this situation, as foreign investors become less enthusiastic about investing in U.S. assets, the supply of loanable funds to the United States decreases. This drop in supply would, according to the loanable funds theory, lead to a shift in the supply curve of financial capital to the left.
As a result of this shift, there is a new market equilibrium at which the supply of loanable funds becomes equal to the demand. However, this new equilibrium, known as E₁, is characterized by a higher real interest rate, R₁, and a lower quantity of financial investment, Q₁. This increase in the real interest rate (R₁) comes as U.S. borrowers have to pay more to attract the reduced investment, reflecting the increased perceived risk and the lesser availability of capital.