The Loanable Funds Market Practice Test

Based on the loanable funds market shown, firms become more optimistic about future profitability and increase planned investment at each real interest rate. Which outcome is most consistent with the model?

Initial equilibrium: $r_1=3%$, $Q_1=250$.

Demand for loanable funds shifts right from $D_1$ to $D_2$ (higher investment demand), while saving supply remains at $S_1$.​

Based on the loanable funds market shown in the table, a tax policy increases after-tax returns to saving, increasing saving at each real interest rate. Using the data as the initial schedules, which statement best describes the new equilibrium relative to the initial equilibrium?

Initial Loanable Funds Schedules

At $r=5%$: $S=600$, $D=600$

At $r=3%$: $S=500$, $D=700$

At $r=1%$: $S=400$, $D=800$

(Quantities are in billions of dollars per year.)