What is the impact of the following factors on the loanable funds (LF) market? A

Question

What is the impact of the following factors on the loanable funds (LF) market?

A. higher disposable income

B. Recession

C. People expect their income to rise in the future

D. Fed lowers RRR

2. The left Shift of demand curve in loanable funds market to down and to left then there must be

A. Increases equilibrium interest rate

B. decreases in funds traded

C. increase in funds traded

D. rise of international funds

3. If the economy in a recession, one reason might be that leakages is _______ injections

A. equal

B. less than

C. greater than

D. less or greater than

Explanation / Answer

1. A) Higher disposable income means higher consumption and less saving, so interest rate increases.

B) Recession causes decrease in interest rate and loanable funds.

C) This leads to increase in current consumption and decrease in saving. Decrease in saving shifts supply curve leftwards causing increase in interest rate and decrease in loanable funds.

D) Lower RRR increases money supply and thus saving. This leads to increase in loanable funds and decrease in interest rate.

2. B) decreases in funds traded

Leftward shift of demand curve decreases funds traded and interest rate.

3. C) greater than

When leakage is greater than injection then Money supply in the economy is lower which leads to recession.

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