Question

use the graph to answer the question.
the loanable funds market is currently in equilibrium at a real interest rate of ( r_1 ). an increase in household savings will affect the loanable funds market in which of the following ways?
a there will be a surplus of funds and the real interest rate will increase.
b there will be a shortage of funds and the real interest rate will decrease.
c the demand for loanable funds will increase and the real interest rate will increase.
d the supply of loanable funds will increase and the real interest rate will increase.
e the supply of loanable funds will increase and the real interest rate will decrease.

Explanation:

Household savings are the source of loanable funds supply. An increase in household savings shifts the supply curve of loanable funds to the right. At the original equilibrium interest rate $r_1$, the quantity of supplied funds now exceeds the quantity demanded, creating a surplus. This surplus pushes the real interest rate downward until a new equilibrium is reached.

Answer:

E. The supply of loanable funds will increase and the real interest rate will decrease.