Answer to Question #230507 in Macroeconomics for Davidson

Question

effects of an increase in disposable income in loanable funds market

Answer 1

Disposable income = income of households from all sources - taxes

An increase in wealth implies an increase in the total income of households and hence an increase in disposable income. This will lead to an increase in the supply of loanable funds.

Since savings constitute the supply of loanable funds, a rise in savings leads to a rise in the supply of loanable funds. On the other hand, an increase in the supply of loanable funds, demand remaining unchanged, push the interest rates upward. This makes borrowing more costly for investors. Therefore, the equilibrium level of investment will fall.