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.

Question

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.

BlackTom AI · Accepted Answer

The question presents a policy described as inducing people to save more, and asks about its effect on the loanable funds market.
Option a: 'the supply of loanable funds and raises interest rates.' Encouraging savings would increase the pool of funds available to lend, which shifts the supply curve of loanable funds to the right. When the supply increases while demand remains the same, the price (interest rate) tends to fall, not rise. Therefore, this option’s claim that interest rates rise is inconsistent with the standard model.
Option b: 'the supply of loanable funds and reduces interest rates.' This aligns with the conventional supply-and-demand framework: higher savings increase the supply of loanable funds, shifting the supply curve rightward and lowering the equilibrium interest rate. The result is more funds available for borrowing at a lower cost, making this option plausible.
Option c: 'the demand for loanable funds and raises interest rates.' A policy that encourages saving does not directly increase the demand for loanable funds; it primarily increases savings supply. If demand were to rise, interest rates might increase, but the premise describes savings behavior, not borrowing needs. Thus this option misattributes the direction of the effect.
Option d: 'the demand for loanable funds and reduces interest rates.' Similar to option c, this describes a shift in demand rather than supply. Reducing interest rates via decreased demand would be inconsistent with saving incentives, which are not typical catalysts for reducing borrowing demand. Therefore this option is incorrect.
In summary, the mechanism described—policies that boost saving raise the supply of loanable funds, which tends to push interest rates down—fits the standard supply-and-demand intuition for the loanable funds market, making the option that matches this sequence the most coherent choice.

LA-ECON-1101-813-14402-202520 Chapter 27-1

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.

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