The figure below shows the result of a change in the market for loanable funds.

Which of the following is the most likely to have caused the shift shown here?

Choose 1 answer:
(A) Domestic saving decreases.
(B) Firms invest less in plant and equipment
(C) The government runs a budget surplus.
(D) Optimism by firms increases investment in physical capital.
(E) Foreign savers view this country as a desirable place to send assets.
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Question

The figure below shows the result of a change in the market for loanable funds.

Which of the following is the most likely to have caused the shift shown here?

Choose 1 answer:
(A) Domestic saving decreases.
(B) Firms invest less in plant and equipment
(C) The government runs a budget surplus.
(D) Optimism by firms increases investment in physical capital.
(E) Foreign savers view this country as a desirable place to send assets.
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Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ To determine the cause of the shift in the supply curve for loanable funds from $ S_{LF1} $ to $ S_{LF2} $, we analyze the effects of each option on the supply of loanable funds. ‖ ‖ step 2 ⋮ An increase in the supply of loanable funds, shifting the supply curve from $ S_{LF1} $ to $ S_{LF2} $, would result in a lower equilibrium interest rate and a higher quantity of loanable funds, moving from $ r_2 $ to $ r_1 $ and from $ Q_{LF2} $ to $ Q_{LF1} $, respectively. ‖ ‖ step 3 ⋮ Option (A) Domestic saving decreases would lead to a leftward shift in the supply curve, which is not what is observed. ‖ ‖ step 4 ⋮ Option (B) Firms invest less in plant and equipment would affect the demand for loanable funds, not the supply. ‖ ‖ step 5 ⋮ Option (C) The government runs a budget surplus would increase the supply of loanable funds, as the government would need to borrow less from the market. ‖ ‖ step 6 ⋮ Option (D) Optimism by firms increases investment in physical capital would increase the demand for loanable funds, not the supply. ‖ ‖ step 7 ⋮ Option (E) Foreign savers view this country as a desirable place to send assets would increase the supply of loanable funds, as foreign investment would increase the available funds for domestic borrowing. ‖ ‖ step 8 ⋮ Comparing the effects of each option, the most likely cause of the rightward shift in the supply curve for loanable funds is an increase in the supply, which could be due to either a government budget surplus or an influx of foreign savings. Since the shift is from $ S_{LF1} $ to $ S_{LF2} $, indicating an increase in supply, we look for the option that would cause such an increase. ‖ ∻Answer∻ ***E*** ∻Key Concept∻ ⚹Supply Curve Shift in the Market for Loanable Funds⚹ ∻Explanation∻ ⚹A rightward shift in the supply curve for loanable funds indicates an increase in the supply of those funds. This can be caused by factors such as a government budget surplus or an increase in foreign investment, which would be seen as foreign savers viewing the country as a desirable place to send assets.⚹◊What type of shift in the market for loanable funds is represented by the graph and what factors might have caused it?⍭ Generate me a similar question◊

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