Question

For each of the following state whether the supply or demand for loanable funds is increasing or decreasing.

a. Individuals cut back on their travel and entertainment spending for fear of catching the coronavirus.

b. Businesses expect the recession to depress profits next year

c. New technological advances make electric cars cost competitive with internal combustion cars

d. Businesses delay their investment plans until after the November 2020 election.

e. There is political unrest in a foreign country

f. State and local governments increase spending to fight the coronavirus

Answer 1

a) Supply of loanable funds will increase. As travel and entertainment spending has been cut down by consumers due to risk from pandemic. Thus all the amount remain in the bank will increase supply of loanble funds.

b) If businesses anticipate future profitability is going to depress, they will not invest and thus demand for loanable funds will decline.

c) Demand for loanable funds will increase because people will demand loans to buy new electric cars.

d) Demand for loanable funds will decrease as businesses are delaying their business plans due to election. Thus they don't need funds to invest so demand for loanable funds will come down.

e) Supply of loanable funds will increase because people will not like to visit the country where there is political unrest. Also capital outflows to such political turmoil country will decrease. Thus overall supply of money will increase.

f) Demand for loanable funds will increase. Government having budget deficit would take loans to spend on public welfare.