Answer to Question #229049 in Macroeconomics for Priest

Question

Consider the market for loanable funds. If expectations about South Africa’s future economic 

performance are negative such that firms cancel plans to build new equipment and factories, then in the 

short-run we would expect: 

i. demand for loanable funds to increase.

ii. supply of loanable funds to decrease.

iii. supply will increase and demand for loanable funds to decrease. 

iv. the interest rate to decrease.

A. Only (i) and (ii) are correct.

B. Only (i) and (iii) are correct.

C. Only (iii) is correct.

D. Only (iii) and (iv) are correct.

Answer 1

The correct answer is: Only (iii) and (iv) are correct.

When the producers know that future economic growth is negative which leads to falling or postponing new equipments plan. It will lead to less demand for loanable funds as borrowers know that market is not performing well, if their borrow money now, it will not give them profit in investing. Supply of loananle funds will rise as for riskier investments, suppliers of loanable funds charge higher interest rate. In case of risky market, it is a chance for them to earn extra money. Thus rising supply of funds and falling demand will leads to falling interest rates.