Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increase demand for loans, leading to higher interest rates
B
Decrease demand for loans, leading to lower interest rates
C
No effect on demand for loans or interest rates
D
Increase supply of loans, leading to lower interest rates
Understanding the Answer
Let's break down why this is correct
Answer
When people feel confident about their future earnings, they are more likely to spend and invest. This optimism makes them want to buy homes, cars, or start businesses, all of which usually require borrowing. Consequently, the demand for loans in the loanable funds market rises, shifting the demand curve to the right. For example, if consumers expect higher wages, they may take out a mortgage to purchase a house. The increased loan demand pushes up the price of loanable funds, encouraging lenders to offer more credit.
Detailed Explanation
When people feel sure about their future money, they want to buy homes or grow businesses. Other options are incorrect because Some think that confident people would save more, so they would borrow less; The belief that confidence only changes how people spend money ignores borrowing.
Key Concepts
Loanable Funds Market
Interest Rates
Consumer Confidence
Topic
Loanable Funds Market Analysis
Difficulty
hard level question
Cognitive Level
understand
Practice Similar Questions
Test your understanding with related questions
1
Question 1How does an increase in consumer income typically affect the market demand for luxury goods?
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2
Question 2If the demand for loanable funds increases while the supply remains unchanged, what is likely to happen to the equilibrium interest rate?
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3
Question 3If there is a sudden increase in investor pessimism about future business conditions, what is the likely effect on the demand for loans in the loanable funds market?
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4
Question 4In the Loanable Funds Market, an increase in demand for loans typically leads to a rise in __________ due to heightened investor optimism about future business conditions.
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5
Question 5A sudden increase in investor optimism leads to a rise in the demand for loans in the loanable funds market. Which of the following scenarios best describes the likely outcome in this market?
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