Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It raises interest rates due to higher demand for loans.
B
It lowers interest rates by increasing the supply of loanable funds.
C
It has no effect on interest rates.
D
It raises interest rates by decreasing the supply of loanable funds.
Understanding the Answer
Let's break down why this is correct
Answer
When the government borrows more money, it usually increases the demand for loans in the loanable funds market. This higher demand can lead to an increase in interest rates because lenders want to be compensated for the higher risk and demand. For example, if the government issues more bonds to fund a new project, investors may choose to buy these bonds instead of lending money to individuals or businesses. As a result, there are fewer funds available for personal or business loans, which can cause interest rates to rise. So, increased government borrowing generally leads to higher interest rates, making it more expensive for everyone to borrow money.
Detailed Explanation
When the government borrows more money, it needs to get loans from banks. Other options are incorrect because Some might think that more borrowing adds more money to the market; It's a common mistake to think that borrowing doesn't change anything.
Key Concepts
Loanable Funds Market
Government Borrowing
Interest Rates
Topic
Loanable Funds Market Dynamics
Difficulty
easy level question
Cognitive Level
understand
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