Question

On a loanable funds market when the real interest rate increases:

A) the supply curve shifts to the right.
B) the quantity of funds supplied by households decreases.
C) the supply curve shifts to the left.
D) the quantity of funds supplied by households increases.

Answer 1

D) the quantity of funds supplied by households increases.

Step-by-step explanation:

In loanable markets, price is the cost of loaned money.

So, increase in their price - i.e interest : increases the supply of loanable funds. Interest rates & supply of loanable funds is positively related : more loanable funds supply at higher interest rate, less loanable funds supply at lower interest rates

Hence, increase in real interest rate increases the quantity of funds supplied by households. Such because, increase in interest increases the opportunity cost of consumption expenditure. So, households consume less & save (deposit) more for higher interest rates.