Export Boom and Safe Haven
The question
A new trade agreement opens a large overseas market to producers in Torvane, and firms there now expect strong sales for a decade and want to build the factories and equipment to serve those orders. In the same period, political turmoil on the far side of the world sends savers there looking for a safe place to park their money, and they move a great deal of it into Torvane's banks and bond markets. Show the effect of these two developments in Torvane's loanable funds market. Show the effect on the Loanable Funds Market graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Export Boom and Safe Haven: the worked answer
On the Loanable Funds Market graph, Demand for loanable funds shifts right and Supply of loanable funds shifts right.
Why Demand for loanable funds shifts right and Supply of loanable funds shifts right
Firms borrow in this market to finance purchases of new physical capital, and a decade of expected export sales raises the profitability of new factories and equipment, so more projects clear the hurdle at every real interest rate and the demand for loanable funds shifts right. The supply of loanable funds is the pool of saving available to borrowers, which in an open economy includes saving that arrives from abroad, so foreign savers moving funds into Torvane's banks and bond markets shifts the supply of loanable funds right. Both shifts push the same way on the horizontal axis, since more borrowing wanted and more lending offered each raise the volume of funds that actually changes hands, so the equilibrium quantity of loanable funds definitely rises. The two shifts conflict on the vertical axis, because stronger investment demand bids the real interest rate up while the added saving bids it down. The equilibrium real interest rate is therefore indeterminate: it rises if the rightward shift of demand is larger, falls if the rightward shift of supply is larger, and is unchanged if the two are equal. The stem does not compare their sizes, so the direction cannot be established.
What happens to the equilibrium
The equilibrium quantity of loanable funds definitely rises, while the equilibrium real interest rate is indeterminate because it depends on whether the increase in investment demand or the inflow of foreign saving is the larger shift.
The mistake students make on this one
Students overwhelmingly claim both outcomes are determinate, and the usual pair is "the quantity rises and the real interest rate rises," because the investment story looks like the tax credit and business optimism questions where the rate always went up. Here the foreign inflow pushes the rate the other way, and with no statement about which shift is larger the rate has no determinate sign. A second error is to put the foreign savers on the borrowing side because they are buying Torvanese bonds: buying a bond is lending, so those funds join the saving side of the market.
On exam day
Learn the pattern by axis: when both curves shift the same way the quantity is settled and the interest rate is not, and when they shift opposite ways the interest rate is settled and the quantity is not, so state the determinate result first and then name the indeterminate variable with the comparison it turns on.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when Demand for loanable funds shifts right and Supply of loanable funds shifts right and every other curve on the Loanable Funds Market graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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