Question

Complete the following statements.

Answer 1

Answer:

a. Dan saves a portion of his income in an interest-earning account. In the loanable funds market, Dan is a supplier of loanable funds.

b. John owns a pizzeria and needs to borrow money for a new oven. In the loanable funds market, John is a demander of loanable funds.

c. Savers like Dan are likely to save more when the real interest rate increases. Therefore, the supply curve for loanable funds slopes upwards.

d. Borrowers like John are likely to borrow more when the real interest rate decreases. Therefore, the demand curve for loanable funds slopes downwards.

Explanation:

a. Savers who invest their money in interest‑earning accounts are providing funds for others to borrow. They act as suppliers of loanable funds.

b. Borrowers are demanders of loanable funds. They often use these funds to expand productive capacity and pay interest for the use of the funds to the lender.

c. Savers offer their funds as loans and receive interest in return. Therefore, savers have an incentive to save more as the interest rate increases, since they thereby receive a higher return. The supply curve for loanable funds slopes upwards as a result.

d. Borrowers have an incentive to borrow more as interest rates fall, since as the cost of borrowing decreases, capital projects become more profitable. The demand curve for loanable funds slopes downwards as a result.