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In the loanable funds model, assume that firms scale back their current and futu

ID: 1142109 • Letter: I

Question

In the loanable funds model, assume that firms scale back their current and future production. The equilibrium interest rate increase/decrease, while the equilibrium quantity of loanable funds increase/decrease.
Choose increase or decrease, and please explain. Thanks! In the loanable funds model, assume that firms scale back their current and future production. The equilibrium interest rate increase/decrease, while the equilibrium quantity of loanable funds increase/decrease.
Choose increase or decrease, and please explain. Thanks!
Choose increase or decrease, and please explain. Thanks!

Explanation / Answer

When firms scale back their production, equilibrium interest rates decrease and quantity of loanable funds decrease.

Reason: When firms lower current and future production, they decrease investment. Since investment is the demand for loanable funds, decrease in investment will decrease the demand for loanable funds, shifting the demand curve leftward, leading to decrease in interest rate and decrease in quantity of loanable funds.

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