Explain the relationship between the real interest rate and
the demand for loanable funds. Compare that relationship to the relationship
between expected profit and the demand for loanable funds.
#Parkin #11edition #Finance #Saving
#Investment #Chapter24
Answer: The real interest rate determines the quantity of loanable funds demanded. There is an inverse relationship between the real interest rate and the quantity of loanable funds demanded. Expected profit affects investment and, because investment is a major source of the demand for loanable funds, the expected profit rate affects the demand for loanable funds. An increase in the expected profit from investing increases investment and thereby increases the demand for loanable funds. Hence there is a positive relationship between the demand for loanable funds and the expected profit rate.
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