In the loanable funds market, which of the following events would shift the dema

Question

In the loanable funds market, which of the following events would shift the demand curve to the left?

In response to tax reform, households are encouraged to save less than they previously saved.

Government goes from running a balanced budget to running a budget deficit.

In response to tax reform, firms are encouraged to invest less than they previously invested.

Any of the above events would shift the demand curve to the left.

In response to tax reform, households are encouraged to save less than they previously saved.

Government goes from running a balanced budget to running a budget deficit.

In response to tax reform, firms are encouraged to invest less than they previously invested.

Any of the above events would shift the demand curve to the left.

Explanation / Answer

Loanable funds are directly proportional to the investments made by firms and people in an economy. An increase in investments will require more of funding through credit and hence, will lead to an increase in demand for loanable funds. Similarly, a decrease in investments will result in a fall in demand of loanable funds.

Hence, he correct answer is (C)

Option (A) is not the answer because household savings only influence the supply of loanable funds as an decrease in household savings result in an decrease in supply of loanable funds and vice-versa.

Option (B) is not the answer because a budget deficit will require the government to borrow more to finance increased government spendings. This, indeed will result in an increase in the demand for loanable funds and hence, will shift their demand curve rightwards.

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