If there is an increase in the real interest rate, there will be a decrease in the number of demanded funds required. This is due to the fact that the demand curve has a downward slope – the lower the interest rate, the more the number of borrowed funds, and vice versa. In practice, this is because, at a higher interest rate, there is a need to return a much more significant amount of money in the event of a loan. As a rule, in this case, people will try to save money and take out loans in smaller amounts in order to protect themselves from possible risks. An example of such a situation is starting a business – with a high real interest rate, an entrepreneur may not have enough loans to successfully start a business and pay back the money (Hayes). This will pause the process of starting a new business until the rate is lowered.
However, on the other hand, the number of supplied funds decreases with a decrease in the real rate. In a graphical and theoretical sense, this is due to the fact that the supply curve has an upward slope. The more the amount of borrowed funds, the higher the offered rate, and vice versa. Accordingly, as you move to the left on the supply schedule, the interest rate gradually decreases, reflecting the declining supply. In practice, it is not profitable for investors to give more money at lower interest rates because, in this case, they will receive less income. Consequently, at a low-interest rate, there will be a restriction on the funds issued since their value will be significantly less.
Work Cited
Hayes, Adam. “How Interest Rates Help Promote Saving and Investing.” Investopedia, Web.