Question 1

Higher national saving increases the supply of loanable funds.

Increasing national saving leads to a greater supply of loanable funds available for borrowing, as savings are a primary source from which funds are loaned out in financial markets.

A) Lower interest rate

While a lower interest rate might encourage borrowing, it does not directly increase the supply of loanable funds. Instead, it can lead to an increase in the demand for loans, as borrowing becomes cheaper, but it does not contribute to the overall savings available in the economy.

B) Higher interest rate

A higher interest rate typically discourages borrowing and may lead to a decrease in the demand for loans. Additionally, while it may incentivize saving, it does not directly increase the overall supply of loanable funds as effectively as higher national saving does.

C) Higher consumption

Higher consumption generally implies that individuals and households are spending more rather than saving, which would lead to a decrease in the supply of loanable funds. Increased consumption can detract from the amount of money available for saving and lending.

D) Higher national saving

Higher national saving directly increases the pool of funds available for loanable funds, as it reflects a greater amount of resources being set aside for future investment and lending. This action enhances the supply side of the loanable funds market.

Conclusion

Higher national saving is the most effective way to increase the supply of loanable funds, as it directly contributes to the availability of financial resources for borrowers. In contrast, the other options either do not increase supply or may even reduce it, demonstrating that national saving is crucial for a robust supply of loanable funds.