Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It generally decreases interest rates due to increased funds available.
B
It raises interest rates due to higher demand for loans.
C
It has no effect on interest rates as the market is unaffected.
D
It leads to lower interest rates by decreasing demand for loans.
Understanding the Answer
Let's break down why this is correct
Answer
When the government borrows more money, it usually needs to attract investors by offering higher interest rates. This is because the government competes with other borrowers in the loanable funds market, which includes businesses and individuals looking for loans. As the demand for funds increases due to the government borrowing, lenders may raise interest rates to balance the supply and demand for loans. For example, if the government decides to borrow a large sum to finance a new project, banks might increase the interest rates they charge on personal loans or mortgages because they have fewer funds available for other borrowers. In this way, increased government borrowing can lead to higher interest rates for everyone in the economy.
Detailed Explanation
When the government borrows more money, it needs to take out loans. Other options are incorrect because Some might think more borrowing means more money available, lowering rates; It's a common mistake to think borrowing doesn't affect rates.
Key Concepts
Loanable Funds Market Dynamics
Government Borrowing Impact
Interest Rate Fluctuations
Topic
Loanable Funds Market Dynamics
Difficulty
medium level question
Cognitive Level
understand
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