Question

Assume that currently banks pay 2% interest on money that customers deposit in savings accounts. As the overall amount of money held in savings accounts increases, in financial markets

Group of answer choices

the supply of savings increases.

the supply of savings decreases.

the demand for savings increases.

both supply and demand are increasing.

Answer 1

Ans. Option a

Savings act as a supply of loanable funds, so, when the savings increase the supply of loanable funds increase creating a surplus of savings in the loanable fund markets leading to decrease of interest rate below 2% which attracts more investments and thus, equilibrium quantity of loanable funds increases in the market. Although increase in supply of savings has not impact on demand for savings but quantity demanded for savings increases.

* Please don’t forget to hit the thumbs up button, if you find the answer helpful.