Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Real interest rates decrease, leading to increased investment.
B
Real interest rates increase, leading to decreased consumption.
C
The supply of loanable funds decreases, resulting in higher borrowing costs.
D
There is no impact on the quantity of funds available for borrowing.
Understanding the Answer
Let's break down why this is correct
Answer
When private savings in an economy increase, more money becomes available for lending in the loanable funds market. This means that banks and financial institutions have more funds to lend to individuals and businesses. As a result, the supply of loanable funds goes up, which usually leads to lower interest rates. For example, if a person saves more money and deposits it in a bank, that bank can then lend out more money to someone who wants to buy a car, making it cheaper for the borrower because of the lower interest rate. Overall, increased savings help make borrowing less expensive, encouraging more people to take loans for things like homes or education.
Detailed Explanation
When people save more money, there is more money available to lend. Other options are incorrect because This option suggests that higher savings lead to higher interest rates; This choice says that savings decrease the supply of loanable funds.
Key Concepts
Savings and Interest Rates
Loanable Funds Market
Investment and Consumption
Topic
Impact of Savings on Interest Rates
Difficulty
medium level question
Cognitive Level
understand
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