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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

If the business community becomes more optimistic about the profitability of capital, the _____ curve for loanable funds would shift, driving the equilibrium interest rate _____.

a. supply, up

b. supply, down

c. demand, up

d. demand, down

To determine

The effect of optimistic future expectations on the loanable fund market.

Explanation

The optimistic behavior makes everything positive. The people will believe in the positive results in the future and expects for positive results when they are optimistic. Those who expect the negative are the inverse and they are known as the Pessimists.

Option (c):

When the business community is optimistic about the future, they will invest more today and will expect better returns in the future. As a result, the investment will increase and in order to meet the capital requirements of the investment, they will demand more loanable funds. The increased demand will increase the interest rate of the loanable funds. Since, option explains this accurately, option 'c' is correct.

Option (a):

When the business increases the investment due to optimistic future expectations, the demand for the loanable funds will increase in order to meet the increased capital needs of the business people...

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