If the demand for loanable funds increases, what will happen to real interest rates and the international value of the U.S. dollar (USD)?
Real Interest Rates / International Value of USD
Increase / Increase***
Increase / Decrease
Decrease / No Change
Decrease / Decrease
Decrease / Increase
I've done some research and it's actually not decrease/decrease like I thought it would be... but I saw one that said it was the first option because "When Demand increases, R also increases. When the real interest rate increases, the international value of the dollar also increases." Would this be correct?
correct.
ok thank you
The correct answer is: Increase / Increase.
When the demand for loanable funds increases, it means that more people are looking to borrow funds for investment purposes. This increased demand leads to an upward pressure on real interest rates. Real interest rates are the interest rates adjusted for inflation.
As real interest rates increase, it becomes more attractive for investors to hold their funds in assets denominated in that currency. This increased demand for the currency leads to an increase in its international value.
Therefore, when the demand for loanable funds increases, both real interest rates and the international value of the U.S. dollar (USD) are expected to increase.
Yes, the first option is correct. When the demand for loanable funds increases, it leads to an increase in the real interest rates.
To understand why, let's break it down:
1. Demand for loanable funds: When there is an increase in demand for loanable funds, it means that more borrowers are seeking loans. This can happen due to factors like increased investment opportunities or economic growth.
2. Real interest rates: The real interest rate is the interest rate adjusted for inflation. When the demand for loanable funds increases, borrowers compete with each other to secure financing. This competition drives up the interest rates charged by lenders. Consequently, the real interest rates increase.
Now, let's see how this increase in real interest rates affects the international value of the U.S. dollar (USD):
3. International value of USD: When the real interest rates in a country increase, it attracts foreign investors looking for higher returns on their investments. As a result, there is an increased demand for the currency of that country (in this case, the USD) in order to invest in its financial assets.
The increased demand for USD strengthens its international value. Therefore, when the demand for loanable funds increases and real interest rates rise in the U.S., the international value of the USD is also likely to increase.
Hence, the correct answer is: Increase / Increase.