Question

7. Consider the market for loanable funds, which curve shifts to which direction if there is a decline in production technologies?

Answer 1

Answer: Supply curve of loanable fund will shift leftward.

If there is a decline in production technologies, the marginal productivity of factors of production will decrease, which in turn will decrease the total production in the economy. The decrease in total production or GDP will decrease the total income of the economy. The decrease in income means, the decrease in savings, which is the source of loanable funds. The decrease in savings will decrease the supply of loanable funds. So, at the same real interest rate, the supply curve of loanable funds will shift leftward.

The above figure shows the market of loanable funds. On the horizontal axis of ythe figure, we are measuring the quantity of loanable funds(LF) in the market and on the vertical axis, we are measuring the real interest rate(r). The 'DF' is the demand curve for loanable funds and the 'SF1' is the initial supply curve of loanable funds in the market. The decrease in production technology decreases the GDP and thus the income of the economy which in turn decreases the total savings in the economy. The decrease in total savings at the financial institutes of the economy decreases the supply of loanable funds. So, at the same interest rate, the supply curve of loanable funds will shift leftward. Thus, 'SF2' is the new supply curve of loanable funds.

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