Which of the following events results in a decrease in the real interest rate?

• A. A decrease in the demand for loanable funds
• B. A rise in expected inflation
• C. An increase in the money supply by the central bank
• D. An increase in government borrowing

Answer: (C)

Verified step by step guidance

1. Understand that the real interest rate is determined by the equilibrium in the loanable funds market, where the supply of loanable funds meets the demand for loanable funds.
2. Analyze how a decrease in the demand for loanable funds affects the real interest rate: a lower demand shifts the demand curve leftward, typically lowering the real interest rate.
3. Consider the effect of a rise in expected inflation: this usually increases the nominal interest rate, but the real interest rate (nominal interest rate minus expected inflation) may not necessarily decrease; it depends on how nominal rates adjust.
4. Examine how an increase in the money supply by the central bank influences the real interest rate: an increase in money supply tends to lower nominal interest rates in the short run, which can reduce the real interest rate if expected inflation does not adjust immediately.
5. Evaluate the impact of an increase in government borrowing: this raises the demand for loanable funds, shifting the demand curve rightward and typically increasing the real interest rate.