Question 17

Higher saving rate increases loanable funds supply and decreases equilibrium interest rate.

An increase in the saving rate leads to a greater supply of loanable funds available for borrowing, which subsequently causes the equilibrium interest rate to decrease due to the inverse relationship between supply and interest rates.

A) Increase, Increase

This option suggests that both the loanable funds supply and the equilibrium interest rate will increase. However, while the loanable funds supply does increase with a higher saving rate, the equilibrium interest rate actually decreases, making this option incorrect.

B) Increase, Decrease

This option accurately reflects the economic principle that a higher saving rate leads to an increase in the supply of loanable funds. As the supply of funds rises, the equilibrium interest rate falls, confirming that this choice is correct.

C) Decrease, Increase

This choice states that the loanable funds supply decreases while the equilibrium interest rate increases. This is contrary to economic expectations, as a higher saving rate would not reduce the supply of funds; thus, this option is incorrect.

D) No change

This option claims that there would be no change in either the loanable funds supply or the equilibrium interest rate. However, an increase in the saving rate directly affects the supply of loanable funds, making this option inaccurate.

Conclusion

Option B is definitively correct because it effectively illustrates the relationship between a higher saving rate, the supply of loanable funds, and the resulting decrease in the equilibrium interest rate. All other options fail to recognize this fundamental economic principle, either misrepresenting the direction of change or suggesting no change at all.