Answer to Question #230712 in Macroeconomics for Nonny

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: 

Answer 1

When producers are aware that future economic growth will be negative, they will reduce or postpone their plans for new equipment. It will reduce demand for loanable funds because borrowers are aware that the market is underperforming and that borrowing money today will not provide them with a reward in the future. The supply of loanable cash will increase as lenders charge greater fees for riskier ventures.