570 PART NINE THE REAL ECONOMY IN THE LONG RUN Second, which way would the demand curve shift? Because firms would have an incentive to increase investment at any interest rate, the quantity of loanable funds demanded would be higher at any given interest rate. Thus, the demand curve for loanable funds would move to the right, as shown by the shift from D 1 to D 2 in the figure. Third, consider how the equilibrium would change. In Figure 25-3, the in-creased demand for loanable funds raises the interest rate from 5 percent to 6 per-cent, and the higher interest rate in turn increases the quantity of loanable funds supplied from $1,200 billion to $1,400 billion, as households respond by increasing the amount they save. This change in household behavior is represented here as a movement along the supply curve. Thus, if a change in the tax laws encouraged greater investment, the result would be higher interest rates and greater saving. POLICY 3:
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