Answer to Question #230858 in Macroeconomics for Olu

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 wi increase and demand for loanable funds to decrease
iv. Interest rate to decrease

Answer 1

If the expectation about South Africa's future economic performance is negative then the firms will prefer not to invest. It is because they know that in future growth prospect is low so income will also be low. In that case, demand will be low, so they will not invest.

If investment will fall then the demand for loanable funds will decrease. Also, people will save more for future uncertainties so the savings (supply of loanable funds) will increase. Due to this, the interest rate will decrease.

So, options iii and iv both are correct.