Question

A decrease in the cost of borrowing (interest rate) will case

a) the demand for loanable funds to increase.

b) the supply of loanable funds to decrease.

c) both A and B.

d) either A or B, but not both.

e) none of the above.

The answer is e, but why? Doesn't a decrease in the interest rate will cause people to save less, but it causes firms to invest more? Why is the answer not c?

Answer 1

The demand for loanable funds to increase

Increase in the demand implies a shift in the demand curve however we know that the shift in demand curve happens due to change in factors other than the price of its own goods, which is interest rate in this case. So, instead of an increase in demand, the quantity demanded will increase.

Same, reasoning applies for Supply i.e instead of Decrease in supply the quantity supplied will decreases.

Therefore, Both are False.