Question

Which one of the following will occur during an increase in the supply of loanable funds?

a) A decrease in interest rates

b) A decrease of the money supply in the economy

c) A decrease in insured deposit amounts

d) A decrease in the savings rate in the economy

Answer 1

Increase in the supply of loanable funds will cause decrease in interest rate. Interest rate is determined by the intersection of supply and demand of the loanable fund. Demand may not increase corresponding to increase in supply. so more loanable funds are available at lesser demand. so it will leads to decrease in interest rates. the correct option is a) decrease in interest rates. all other options are incorrect. the increase in supply of loanable fund will increase money supply in the economy not decrease and it will not decrease insured deposit amount and saving rate in the economy.