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An increase in the real interest rate leads to ___________in the amount of national saving...

Question:

An increase in the real interest rate leads to _in the amount of national saving because households reduce their .

An increase in the interest rate leads firms to their amount of desired investment.

In the long-run, with output equal to potential, equilibrium in the market for loanable funds determine the interest rate as well as the amount of

A. Desired saving and desired production in the economy

B. Desired consumption and desired investment in the economy

C. Desired consumption and desired saving in the economy

D. Desired saving and desired investment in the economy.

Following a shift in either the supply of national saving or the demand for investment, there will be a change in both the

A. Equilibrium nominal interest rate and the rate of growth of consumption in the economy

B. Equilibrium nominal interest rate and the rate of growth of expected output in the economy

C. Equilibrium real interest rate and the rate of growth of potential output in the economy

D. Equilibrium real interest rate and the rate of growth of consumption in the economy.

An increase in the amount of the economy's resources devoted to _leads to an increase in the growth rate of _output.

Loanable funds Market

Loanable funds market is the one where in there is buying and selling of all the forms of credit like savings, bonds, loans, and so on. It is a market where the forces of demand and supply for loanable funds determine the market interest rate. The market interest determined in this market is real interest rate and not nominal interest rate.

Answer and Explanation:

(1)

An increase in the real interest rate leads to decrease in the amount of national saving because households reduce their investment.

The reason behind this it that due to an increase in the real interest rate, the consumers will start consuming more and save less amount of the total income. This will lead to a reduction in the investment.

(2)

An increase in the interest rate leads firms to reduce their amount of desired investment.

The reason behind this is the same as mentioned in part (1).

(3)

The correct answer is option D.

In the long run, with output equal to potential, equilibrium in the market for loanable funds determine the interest rate as well as the amount of desired saving and desired investment in the economy.

The reason behind this is that when the economy is at equilibrium where the actual output is equal to the potential output, the savings are equal to the investment.

Option A is incorrect because the equilibrium does not show the desired saving and desired production in the economy.

Option B is incorrect because at the equilibrium, the desired consumption is not equal to the desired investment.

Option C is incorrect because at the equilibrium, the desired consumption is not equal to the desired savings.

(4)

The correct answer is option C.

Following a shift in either the supply of national saving or the demand for investment, there will be a change in both the equilibrium real interest rate and the rate of growth of potential output in the economy.

The reason behind this is that the supply of savings and demand for investment shows a relation with the real interest rate. So, a change in them will lead to a change in the real interest rate. Also they show rate of growth of potential output in the economy as due to a change in the real interest rate, there will be a change in the output too.

Option A is incorrect because the supply of national saving or demand for investment does not show a change in both the equilibrium nominal interest rate and the rate of growth of consumption in the economy. The nominal interest rate is related to the money market.

Option B is incorrect because the supply of national savings or demand for investment does not show a change in the equilibrium nominal interest rate.

Option D is incorrect because the supply of national saving or demand for investment does not show a change in the rate of growth of consumption in the economy.

(5)

An increase in the output of the economy's resources devoted to investment leads to an increase in the growth rate of potential output.

The reason behind this is that the output will increase the growth rate of potential output which will which happens due to the economy's resources devoted to investment.


Learn more about this topic:

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Loanable Funds: Definition & Theory

from Introduction to Business: Homework Help Resource

Chapter 25 / Lesson 29
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