Real interest rate equals nominal minus expected inflation is:

Rationale

Higher saving rates lead to an increase in loanable funds supply and a decrease in the equilibrium interest rate.

When saving rates rise, individuals deposit more money into banks, increasing the supply of loanable funds. This increased supply typically leads to a lower equilibrium interest rate as lenders have more funds to offer, driving down the cost of borrowing.

A (Fisher equation) CORRECT

If the saving rate were to increase, the supply of loanable funds would indeed rise; however, this would not lead to an increase in the equilibrium interest rate. Instead, with more funds available, the equilibrium interest rate would decrease, contradicting this choice.

B (Quantity theory) YOUR ANSWER

An increase in the saving rate results in a higher supply of loanable funds, which subsequently lowers the equilibrium interest rate. This reflects the fundamental relationship between supply and demand in the loanable funds market, making this choice correct.

C (Money multiplier) YOUR ANSWER

This option suggests that an increase in saving rates would lead to a decrease in the supply of loanable funds, which is incorrect. Higher saving rates actually increase the supply, which would not drive the equilibrium interest rate higher but lower it instead.

D (Keynesian cross) YOUR ANSWER

If saving rates increase, the supply of loanable funds cannot remain unchanged. An increase in savings directly influences the amount of money available for lending, thereby affecting the equilibrium interest rate, making this choice incorrect.

Conclusion

In summary, an increase in saving rates results in a greater supply of loanable funds, which subsequently leads to a decrease in the equilibrium interest rate. This relationship highlights the dynamic interplay between savings and interest rates in the economy, reinforcing the importance of understanding these financial mechanisms for both individuals and policymakers.

Real interest rate equals nominal minus expected inflation is:

Higher saving rates lead to an increase in loanable funds supply and a decrease in the equilibrium interest rate.

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