... will have to be increased and not decreased. A) Economic theory suggests that the rate of interest is determined by the demand for and supply of money. To be more specific, the price of money is the rate of interest. An increase in the demand for money or a fall in the supply of money will increase the rate of interest. A fall in demand for money or an increase in the supply of money will lead to a fall in the rate of interest. The equilibrium rate of interest is where the demand for and supply of money are equal. The demand for loanable funds comes from the households and firms who would like to borrow to finance investments. This demand includes families taking out mortgages to buy a new house and also includes firms borrowing to afford new machinery or plant sites. Investment in these cases is the source ...

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