Question

Triniland is recognized as a high-income economy by the World Bank. Assume that households in Triniland decide to increase their savings for retirement. (a) Using a correctly labelled diagram of the loanable funds market, show how the increase in savings will affect the equilibrium real interest rate

Answer 1

As we can see from the graph above, an increase in savings will shift the supply curve for loanable funds to the right. As a result, the equilibrium quantity of loanable funds will increase and the interest rate will decrease.