570PART NINETHE REAL ECONOMY IN THE LONG RUNSecond, which way would the demand curve shift? Because firms would havean incentive to increase investment at any interest rate, the quantity of loanablefunds demanded would be higher at any given interest rate. Thus, the demandcurve for loanable funds would move to the right, as shown by the shift from D1toD2in 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 fundssupplied from $1,200 billion to $1,400 billion, as households respond by increasingthe amount they save. This change in household behavior is represented here as amovement along the supply curve. Thus, if a change in the tax laws encouragedgreater investment, the result would be higher interest rates and greater saving.
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