Answer to Question #230943 in Macroeconomics for Yola

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 the producers know that future economic growth is negative which leads to falling or postponing new equipment plans. 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. The supply of loanable funds will rise as for riskier investments, suppliers of loanable funds charge higher interest rates. In the case of a risky market, it is a chance for them to earn extra money. Thus the rising supply of funds and falling demand will lead to falling interest rates.