Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
reserve requirements
B
interest rates
C
total reserves
D
loan supply
Understanding the Answer
Let's break down why this is correct
Answer
In the loanable funds market, when more borrowers want loans, the demand for funds rises. This pushes the price of borrowing higher, which is reflected in higher interest rates. Higher rates signal that investors expect better business prospects and are willing to pay more to secure capital. For example, if a company needs a loan for a new plant, the extra demand raises rates, making it costlier to borrow. Thus, an increase in loan demand typically leads to a rise in interest rates.
Detailed Explanation
When more borrowers want money, banks raise interest rates to decide who gets the limited funds. Other options are incorrect because People sometimes think banks change the amount they must keep in reserve when loan demand rises; Some think that if many loans are taken, banks will hold more total reserves.
Key Concepts
Loanable Funds Market
Interest Rates
Investor Confidence
Topic
Loanable Funds Market Analysis
Difficulty
easy 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 2A 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
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?
easyEconomics
Practice
4
Question 4How would an increase in consumer confidence affect the demand for loans in the loanable funds market?
hardEconomics
Practice
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?
mediumEconomics
Practice
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