If there is a shortage in the market for loanable funds,what happens to desired saving and desired investment as the interest rate moves to its equilibrium value?
A)desired saving and desired investment both fall
B)desired saving and desired investment both rise
C)desired saving falls and desired investment rises
D)desired saving rises and desired investment falls

Question

Quizplus · Accepted Answer

If there is a shortage of loanable funds in the market, the interest rate will increase to reach equilibrium. As the interest rate rises, the opportunity cost of spending today (instead of saving) becomes higher, leading to a rise in desired saving. On the other hand, the cost of borrowing (interest rate) becomes higher, leading to a fall in desired investment. Therefore, desired saving rises and desired investment falls.

If There Is a Shortage in the Market for Loanable