Answer to Question #153844 in Macroeconomics for Jason

Question

1)    Assume that Proton and Perodua will be working together through research and development in a joint project to produce an all-electric-vehicle for the Malaysian market. Suppose the project includes building a new assembly plant based in Malaysia. Show on a graph the effect of Proton or Perodua going to the loanable funds market to finance the new assembly plant. Explain the effect on the real interest rate, private saving, and investment. 

Answer 1

r.i.r. - real interest rate

S_LF - supply of loanable funds

D_LF - demand for loanable funds

An increase in the demand for loanable funds (Proton or Perodua going to the loanable funds market to finance the new assembly plant) leads to an increase in the real interest rate.

Higher real interest rate leads to higher private saving and lower investment.