Question

The demand for loanable funds decreases while the supply simultaneously increases. This would cause the equilibrium

1)quantity of loanable funds to increase, but the effect on the equilibrium interest rate would be uncertain.

2)interest rate to decrease, but the new equilibrium quantity would be uncertain.

3)quantity of loanable funds to increase and the equilibrium interest rate to decrease.

4)quantity of loanable funds to decrease and the equilibrium interest rate to increase.

5)interest rate to increase, but the new equilibrium quantity would be uncertain.

Answer 1

2) is correct

Decrease in demand and increase in supply of loanable funds both lead to decrease in interest rate but decrease in demand leads to decrease in quantity of funds and increase in supply leads to increase in quantity of funds. Thus the net effect on quantity is uncertain without the magnitudes of changes in demand and supply.