Question

25. If the rate of economic growth in the economy increases, investors will typically demand a higher bond yield when purchas ing T-bonds. Explain how economic growth, the demand for loanable funds in the economy, and bond yields demanded by investors are linked.

Answer 1

As the economic growth increases the demand for the loanable funds increase because people are more well-off than earlier and they will demand for more goods so the producers are induce to produce more so they need funds For investment so the demnad for the loanable funds increase.

Let's understand with the help of diagram

Interest rate Q: Q2 Quantity of loanable funds

As we can see in above diagram as the demand for the loanable funds increases it will lead to rise in the real interest rate of the economy. In above diagram interest rate shift From IR_{​​​​​1}​​​​ to IR_{​​​​​2.}

_{so we can explain above statement that as the economy grows it will leads to increase in demand of loanable fund and that will cause rise in the real interest rate.}

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