Question

An increase in the demand for loanable funds will occur if there is A. an increase in the real interest rate. B. an increase in the nominal interest rate accompanied by an equal increase in inflation. C. a decrease in the real interest rate. D. an increase in expected profits from firm investment projects.

Answer 1

Answer:

C, a decrease in the real interest rate

Explanation:

When factors such as changes in expectation, technology, demands for goods and services, etc cause in shift in the demand curve for capital, interest rates act as the determinant of the capital demand.

If the interest rates of loans are high, capital demand will be reduced but in the event that interest rates are low, capital demand is high or increases.

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Answer 2

Answer:

The correct answer is letter "D":  an increase in expected profits from firm investment projects.

Explanation:

The market of loanable funds represents the fluctuations in the borrowing of a market. The demand for loanable funds depends on borrowing as well. Two main factors cause changes in the demand for loanable funds: changes in the expected Rate of Return (RoR) on investment spending and government policies.

In this scenario, the real interest rate follows the trend of the market. It implies if the RoR on investments increases, the real interest rate will increase as well. If the economy is underperforming, the real interest rate will decrease.