Which of the following changes in the loanable funds market will decrease the equilibrium real interest rate?

a. A decrease in private savings

b. A decrease in the expected inflation rateBAn increase in government spending on highways financed by borrowing

C. An increase in foreign financial capital inflows

D. An investment tax credit for plant and equipment

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6 November, 23:23

Which of the following changes in the loanable funds market will decrease the equilibrium real interest rate?

a. A decrease in private savings

b. A decrease in the expected inflation rateBAn increase in government spending on highways financed by borrowing

C. An increase in foreign financial capital inflows

D. An investment tax credit for plant and equipment

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Answers (1)

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Branden Skinner · Answer 1

The answer is Option C

Explanation:

Any event that would either decrease the demand for loanable funds or increase the supply of loanable funds will decrease the equilibrium interest rates. Supply of loanable funds is affect by the amount of national savings. National savings in turn, is the sum of private savings, public saving and net capital inflow.

In option C, capital inflows are increasing. This means that there would be an excess supply of money in the economy which can be converted into loanable funds. This would, therefore, push the supply curve to the right thereby reducing the real interest rate equilibrium.