Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The demand for loans will increase
B
The demand for loans will decrease
C
The interest rates will rise
D
There will be no change in the demand for loans
Understanding the Answer
Let's break down why this is correct
Answer
When investors grow more pessimistic about future business conditions, they expect lower profits and higher risks, so they are less willing to borrow money for new projects or expansions. This drop in borrowing desire lowers the demand for loans in the loanable funds market. As a result, the demand curve shifts leftward, reducing the equilibrium loan price and increasing the quantity of funds supplied. For example, if a company expects sales to fall next year, it will postpone building a new factory, cutting its need for a construction loan. Consequently, banks will see fewer loan applications and the interest rate may fall until the loan supply matches the new, lower demand.
Detailed Explanation
When investors expect worse business, they want fewer new projects. Other options are incorrect because The misconception is that bad news would make banks lend more; This option confuses the effect of demand with price changes.
Key Concepts
Loanable Funds Market
Investor Sentiment
Interest Rates
Topic
Loanable Funds Market Analysis
Difficulty
easy level question
Cognitive Level
understand
Practice Similar Questions
Test your understanding with related questions
1
Question 1A local business owner is considering taking out a loan to expand operations. However, recent news reports have shown a downturn in the economy, causing widespread pessimism among investors. How is this likely to affect the interest rates in the loanable funds market?
mediumEconomics
Practice
2
Question 2In 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
3
Question 3How would an increase in consumer confidence affect the demand for loans in the loanable funds market?
hardEconomics
Practice
4
Question 4A 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?
mediumEconomics
Practice
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