Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It will decrease interest rates due to higher government borrowing.
B
It will increase the demand for loans, leading to higher interest rates.
C
It will have no effect on the availability of loanable funds.
D
It will lead to an increase in savings, reducing the demand for loans.
Understanding the Answer
Let's break down why this is correct
Answer
When a government increases its spending without raising taxes, it usually needs to borrow money to cover the extra costs. This borrowing increases the demand for loanable funds in the market because the government is looking for loans to finance its spending. As demand for loans goes up, interest rates tend to rise, making it more expensive for individuals and businesses to borrow money. For example, if the government borrows a lot for building new schools, it may lead to higher interest rates, which could discourage a family from taking out a loan to buy a house. Overall, the increased government spending can lead to tighter borrowing conditions for everyone else in the economy.
Detailed Explanation
When the government spends more, it needs to borrow money. Other options are incorrect because Some might think that more borrowing lowers interest rates; It's a common mistake to think spending has no effect.
Key Concepts
Loanable Funds Market Dynamics
Expansionary Fiscal Policy
Interest Rate Fluctuations
Topic
Loanable Funds Market Dynamics
Difficulty
easy level question
Cognitive Level
understand
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