Question

In a large open economy, what is one of the reasons the demand curve for loanable funds is downward sloping? A higher real interest rate makes borrowing more expensive. A lower real interest rate discourages investment. A lower real interest rate discourages domestic consumers from buying foreign assets and encourages foreigners to buy domestic assets. A higher real interest rate encourages people to save.

Answer 1

Answer:

A higher real interest rate makes borrowing expensive

Explanation:

In the determination of equilibrium interest rate, when we plot a demand and supply curve for loanable funds, it is discovered that a down slope in the demand curve for loanable funds indicates that when interest rates are lower, more funds are demanded from borrowers for investment. This means that higher real interest makes borrowing expensive and discourages investments. On the other hand, there is an upward slope in the supply curve for loanable funds, meaning that lenders want to lend more fund when the interest rate is higher.