Suppose that expected profit decreases. This change means
A) the supply curve for loanable funds shifts rightward and the nominal interest rate rises.
B) the real interest rate rises as saving increases.
C) the demand curve for loanable funds shifts leftward and the real interest rate falls.
D) there is a movement down along the demand curve for loanable funds.

Question

Quizplus · Accepted Answer

A decrease in expected profit would lead to a decrease in investment, which would shift the demand curve for loanable funds to the left. As a result, the real interest rate would fall. Choice A is incorrect because a decrease in expected profit would not shift the supply curve for loanable funds. Choice B is incorrect because there is no necessary relationship between a change in expected profit and the level of saving. Choice D is incorrect because a movement down along the demand curve would imply a decrease in the real interest rate, which is not necessarily the case.

Suppose That Expected Profit Decreases. This Change Means