Question

19 mark for review which of the following is true about the loanable funds market? a the demand for loanable funds shows a positive relationship between real interest rates and the quantity demanded of loanable funds. b the supply of loanable funds shows an inverse relationship between real interest rates and the quantity supplied of loanable funds. c investment is financed by national savings in a closed economy. d investment is financed by government borrowing in an open economy. e public savings is the sum of national savings and private savings.

Explanation:

• Option A: Demand for loanable funds has an inverse (not positive) relationship with real interest rates, as higher rates make borrowing costlier, reducing quantity demanded.
• Option B: Supply of loanable funds has a positive (not inverse) relationship with real interest rates, as higher rates incentivize more saving, increasing quantity supplied.
• Option C: In a closed economy, there is no international trade/finance, so all investment is funded by national savings (sum of private and public savings). This is correct.
• Option D: In an open economy, investment is financed by national savings plus foreign capital inflows, not just government borrowing.
• Option E: National savings is the sum of private savings and public savings, not the other way around.

Answer:

C. Investment is financed by national savings in a closed economy.