The supply of loanable funds increases because people decide to be more thrifty.?

Question

Which of the following is most likely to occur?

A) interest rates increases, and investment spending increases.

B) interest rates increases, and investment spending decreases.

C) interest rates decreases, and investment spending increases.

D) interest rates decreases, and investment spending decreases.

Answer 1

C) interest rates decreases, and investment spending increases.

Answer 2

This question can not be answered, until it is known why consumers are being more thrifty.

Consumer on average do not become more thrifty unless

inflation is increasing, as price increase they will substitute for lower priced items from the same industry.

If this is the cause, then interest rate will decrease to make more funds available to the consumer.

However, the supply of loanable funds is an aggregate term.

Therefore one may assume that the cause is in fact inflation.

If an economy can not sell all that it produces, investors will not invest in the products that are not selling, however it makes room for substitute product to take larger portion of the total market shares.

There are to many assumption and variable to answer the question with informed knowledge.

But relying on the assumption that inflation is the culprit. and the fact that it is only assumed by economist that a decrease in interest rates will spur on investment spending is false, but what is taught in schools.

Your answer would be; C