Answer to Question #229050 in Macroeconomics for Priest

Question

All else equal, which of the following will occur as a result of an increase in a household’s disposable 

income? 

(i) The household’s savings will increase.

(ii) The will be a surplus of loanable funds in the loanable funds market.

(iii) The real interest rate will rise.

(iv) The equilibrium quantity of loanable funds will fall.

A. Only ii and iv are correct.

B. Only i and ii are correct.

C. Only iii and iv are correct.

D. Only i and iii are correct.

Answer 1

• The correct answer is B. Only i and ii are correct.

(i). Household saving depends directly on disposable income. Normally, an increase in disposable income will make individuals increase their savings.

(ii). A rise in savings causes an increase in the supply of loanable funds. An increase in the supply of loanable funds with no matching growth in demand for loanable funds will cause a surplus of loanable funds.

• Why responses iii and iv are incorrect

(iii). An increase in the supply of loanable funds means that the real interest rate will fall.

(iv). An increase in the supply of loanable funds will cause a rise in the equilibrium quantity of loanable funds.