A local government has recently implemented a new policy encouraging residents to increase their savings by offering tax incentives. As a result, private savings in the community have significantly increased. How is this likely to affect the real interest rates in the local loanable funds market and what implications does this have for borrowing and investment in the area?

When more people in the community start saving money, it increases the total amount of money available in the local loanable funds market. This extra supply of savings can lead to lower real interest rates, which is the cost of borrowing money. For example, if a family saves more and puts their money in a local bank, that bank now has more funds to lend to others. As interest rates drop, borrowing becomes cheaper for businesses and individuals, encouraging them to take loans for investments, like expanding a business or buying a home. Overall, this can boost economic activity in the area as more people can afford to invest in projects or make significant purchases.