Consider the Loanable Funds Model: Which of the following is consistent with the graph depicted below?

Question

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Begin by identifying what the graph is showing: in the Loanable Funds Model, the horizontal axis measures loanable funds and the vertical axis shows real interest rate. The graph depicts a shift of the supply of loanable funds from S1 to S2 (an outward/rightward shift) with the demand curve remaining in place, and the new equilibrium occurs at a higher quantity of funds (L2) and a lower interest rate (i2). This pattern indicates more saving in the economy, which increases the supply of loanable funds.

Option 1: There is a shift from a consumption tax to an income tax. This is a fiscal policy detail that could affect budgets or incentives, but the graph specifically shows a shift in the supply of loanable funds due to saving behavior. On its own, changing from consumption to income tax does not directly map to the depicted increase in supply of loanable funds unless it is explained as a change in saving behavior, which the graph does not indicate.

Option 2: The government runs a budget deficit. A deficit typically crowds out private investment by shifting the demand for loanable funds to the right (increasing interest rates) or by reducing public saving, which would affect the curves in a way not consistent with a clear rightward shift of the supply curve as shown. This option does not align with the supply shift highlighted in the graph.

Option 3: The desire of households to consume today decreases. This directly translates into higher savings by households, increasing the supply of loanable funds. On the graph, an outward shift of the supply curve from S1 to S2 and a movement to a lower interest rate with a higher quantity of funds (L2) matches this interpretation, making this option consistent with the depicted graph.

Option 4: New government regulations decrease the profitability of new investment. A drop in investment profitability would likely reduce the quantity demanded for loanable funds and shift the demand curve left (not the supply). Since the graph shows a shift in supply rather than demand, this choice does not fit the depicted scenario.

ECON 2002.01 AU2025 (21333) Final Exam- Requires Respondus LockDown Browser

Consider the Loanable Funds Model: Which of the following is consistent with the graph depicted below?

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Similar Questions

The supply of loanable funds curve is ___ sloping because _ respond to lower interest rates by ___ their quantity supplied of loanable funds.

A decrease in household savings due to higher consumer spending will generally cause a _ the _for loanable funds.[Fill in the blank]

A policy that induces people to save more shifts a. the supply of loanable funds and raises interest rates. b. the supply of loanable funds and reduces interest rates. c. the demand for loanable funds and raises interest rates. d. the demand for loanable funds and reduces interest rates.

The figure above shows the loanable funds market. The equilibrium real interest rate is , and the equilibrium quantity of loanable funds is .

An increase in people's expected future disposable income saving supply, and the supply of loanable funds curve .

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ECON 2002.01 AU2025 (21333) Final Exam- Requires Respondus LockDown Browser

Consider the Loanable Funds Model: Which of the following is consistent with the graph depicted below?

View Explanation

Log in for full answers

Similar Questions

The supply of loanable funds curve is _____ sloping because _____ respond to lower interest rates by _____ their quantity supplied of loanable funds.

A decrease in household savings due to higher consumer spending will generally cause a ___________ the ___________for loanable funds.[Fill in the blank]

A policy that induces people to save more shifts a. the supply of loanable funds and raises interest rates. b. the supply of loanable funds and reduces interest rates. c. the demand for loanable funds and raises interest rates. d. the demand for loanable funds and reduces interest rates.

The figure above shows the loanable funds market. The equilibrium real interest rate is ________, and the equilibrium quantity of loanable funds is ________.

An increase in people's expected future disposable income ________ saving supply, and the supply of loanable funds curve ________.

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

The supply of loanable funds curve is ___ sloping because _ respond to lower interest rates by ___ their quantity supplied of loanable funds.

A decrease in household savings due to higher consumer spending will generally cause a _ the _for loanable funds.[Fill in the blank]

The figure above shows the loanable funds market. The equilibrium real interest rate is , and the equilibrium quantity of loanable funds is .

An increase in people's expected future disposable income saving supply, and the supply of loanable funds curve .