Question

There are two aspects of efficiency that the equilibrium of market for loanable funds exhibits. Select the TWO statements that characterize these two aspects of efficiency. a. Savers who lend money are willing to accept a lower minimum interest rate than potential savers who do not lend money. b. Investment projects that are financed by savers have larger rates of return than projects that do not receive financing. c. Investment projects that are financed have smaller rates of return than projects not receiving financing. d. All potential savers lend money. e. Savers who lend money are willing to accept a higher minimum interest rate than potential savers who do not lend money. f. There is always a small surplus of funds in the market.

Answer 1

Answer:

a. Savers who lend money are willing to accept a lower minimum interest rate than potential savers who do not lend money.  

b. Investment projects that are financed by savers have larger rates of return than projects that do not receive financing.  

Explanation:

Loanable funds refer to the aggregate amount of money that all sectors, entities and individuals within an economy have decided to keep as an investment, instead of spending on personal consumption, by saving and giving them out as loans to borrowers.  

The market for loanable funds is in equilibrium when the supply of loanable funds by the saver is equal to demand for loanable funds by the borrowers at a given interest rate.

When the market for loanable funds is in equilibrium, efficiency is maximized because projects that have higher rates of return are given priority to be funded first before the projects with lower rates of return are funded. The reason is that savers that have lowest costs of lending provides funds for the projects that have highest return rates in equilibrium. However, potential saver who do not lend money will prefer a higher interest rates.

Therefore, the correct options related to the two aspects of efficiency that the equilibrium of market for loanable funds exhibits are as follows:

a. Savers who lend money are willing to accept a lower minimum interest rate than potential savers who do not lend money.  

b. Investment projects that are financed by savers have larger rates of return than projects that do not receive financing.