Technological change can increase the demand for loanable funds because it

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Question restated: Technological change can increase the demand for loanable funds because it

Option 1: increases people's expected future disposable income. This is not the main channel linking tech change to the demand for loanable funds. Technological advancement affects firms’ investment opportunities and profitability more directly than it guarantees higher households’ disposable income in the future. Therefore this statement misattributes the mechanism to household income rather than investment demand.

Option 2: has little effect on production cost. In reality, technological advancements often alter production costs—potentially lowering them by improving efficiency or raising them through the need for new capital and training. Claiming 'little effect' ignores the typical impact of technology on costs and investment needs, making this assertion unlikely.

Option 3: decreases the need for additional equipment. On the contrary, technological change frequently increases the need for new equipment, capital stock, and upgrades to take advantage of new capabilities. This makes the statement generally false as a rule of thumb in the context of loanable funds demand.

Option 4: can increase the expected profit. This is the core mechanism by which technology boosts the demand for loanable funds: higher expected profits from new, tech-driven investment projects raise the marginal return on borrowing for firms, encouraging more investment and thus increasing demand for loanable funds. The logic aligns with investment theory and the loanable funds framework, where future profitability shifts the desired investment level upward.

Option 5: lowers the interest rate. Technological change by itself does not directly lower the market interest rate; rates are determined by aggregate saving, investment, and monetary policy conditions. While a favorable shift in expected profits can influence investment, it does not automatically translate to a lower rate in all contexts, so this statement is not a reliable general claim about the link between tech change and loanable funds.

Summary: The most accurate statement is that technological change can increase the expected profit, which motivates greater borrowing for investment and thus raises the demand for loanable funds. The other options either misstate the direct effects on household income, production costs, equipment needs, or the direction of interest rates.

ECON 210-003 Homework 9

Technological change can increase the demand for loanable funds because it

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