Step 1 •If there is a rise in the real interest rate, how does the quantity of l

Question

Step 1 •If there is a rise in the real interest rate, how does the quantity of loanable funds demanded change? Explain. •If there is a fall in the real interest rate, how does the quantity of loanable funds supplied change? Explain. Step 2 Month Real Interest Rate (%) Loanable Funds (trillions of $) Exogenous Change Equilibria (increases, decreases, or no change) January 3% 3 no change no change April 3% 4 increased fund supply ? July 4% 2 decreased fund supply ? December 3% 3 increased fund demand ?

Explanation / Answer

When there is a rise in the real interest rate, an individual would try to postpone his expenditure and try to maximize his savings so as to get the maximum benefit from the higher real interest rate.

Similarly, when there is a fall in the real interest rate, an individual would not bother to spend money and may not go for any savings.

Thus, when there is a rise in real interest rate, the quantity of loanable funds demanded would fall,

while when there is a fall in real interest rate, the quantity of loanable funds demanded would increase/rise.

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