Question

Question 1: Explain how each of the following events affect the supply of loanable funds curve (shift or move):
a) The economy is in a recession so people's disposable income is lower.
b) The stock market is booming so the people's wealth is higher.
c) Fewer college graduates are finding jobs so expected future income is lower.
d) The real interest rate increases.

Answer 1

a) Disposable income is lower, so saving is decreased. The supply of loanable funds

curve shifts leftward.

b) People are wealthier, so they save less. The supply of loanable funds curve shifts leftward.

c) Expected future income is lower, so people save more. The supply of loanable funds curve

shifts rightward.

d) The quantity of saving increases. There is an upward movement along the supply of loanable

funds curve but no shift in the curve.