Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Real interest rates will decrease due to higher loan demand.
B
Real interest rates will increase due to higher loan demand.
C
The supply of loanable funds will increase, resulting in stable interest rates.
D
The demand for deposits will decrease, leading to lower interest rates.
Understanding the Answer
Let's break down why this is correct
Answer
When investors feel more confident, they want to borrow more, so the demand curve for loanable funds shifts to the right. This shift pushes the equilibrium interest rate up, because lenders can charge more to satisfy the higher demand. As a result, the quantity of loanable funds borrowed also rises, meaning more money flows into loans. In short, higher investor optimism raises both the price (interest rate) and the volume of loans in the market.
Detailed Explanation
When borrowers want more loans, the cost of borrowing rises. Other options are incorrect because The mistake is thinking higher demand pulls rates down; Assuming supply rises instantly is wrong.
Key Concepts
Loanable Funds Market
Real Interest Rates
Investor Confidence
Topic
Loanable Funds Market Analysis
Difficulty
medium level question
Cognitive Level
understand
Practice Similar Questions
Test your understanding with related questions
1
Question 1If the demand for loanable funds increases while the supply remains unchanged, what is likely to happen to the equilibrium interest rate?
easyEconomics
Practice
2
Question 2If 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?
easyEconomics
Practice
3
Question 3In 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.
easyEconomics
Practice
4
Question 4How would an increase in consumer confidence affect the demand for loans in the loanable funds market?
hardEconomics
Practice
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