Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It will rise.
B
It will fall.
C
It will remain the same.
D
It will fluctuate unpredictably.
Understanding the Answer
Let's break down why this is correct
Answer
When people want to borrow more money, the demand curve for loanable funds shifts to the right. The supply of funds stays the same, so the new intersection point with the unchanged supply curve occurs at a higher price. In the loanable funds market, the price is the interest rate, so the equilibrium rate rises. For example, if banks can lend $100 million at a 5% rate but borrowers now want $120 million, the banks will raise the rate to about 6% to balance the new demand. Thus, the equilibrium interest rate will go up.
Detailed Explanation
When borrowers want more loans but the amount of money available hasn't changed, lenders compete to give loans. Other options are incorrect because Thinking the rate would fall assumes lenders lower rates to attract borrowers, but supply hasn't changed; higher demand pushes price up, not down; Believing the rate stays the same overlooks that prices move when demand changes.
Key Concepts
Interest Rate Determination
Topic
Loanable Funds Market Analysis
Difficulty
easy level question
Cognitive Level
understand
Practice Similar Questions
Test your understanding with related questions
1
Question 1In 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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2
Question 2How would an increase in consumer confidence affect the demand for loans in the loanable funds market?
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3
Question 3A 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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4
Question 4What happens to the market equilibrium price if there is an increase in demand while supply remains constant?
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5
Question 5What happens to the equilibrium price of a good when there is a decrease in demand while supply remains constant?
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6
Question 6If the demand for a product increases while supply remains constant, what is likely to happen to the market equilibrium price?
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