Assume that currently banks pay 2% interest on money customers deposit in savings accounts. As the...
Assume that currently banks pay 2% interest on money customers deposit in savings accounts. As the overall amount of money held in savings accounts increases, in financial markets, the interest rate paid on savings would
a) increase
b) remain unaffected
c) decrease
Homework Answers
If the overall amount of money held in savings accounts increases, the supply of loanable funds in the financial markets increases.
At a given demand, an increase in the supply of loanable funds reduces the equilibrium interest rate.
This, in turn, reduces the interest rate paid on savings as a consequence of less rate of interest obtained by the banks on the loaned out funds.
Ans: Decrease
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