Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It decreases the supply of loanable funds
B
It increases the demand for loanable funds
C
It has no effect on the loanable funds market
D
It decreases interest rates
Understanding the Answer
Let's break down why this is correct
Answer
When the government borrows more money, it usually means they are taking loans from the same pool of money that individuals and businesses use to borrow. This increased demand for loans can lead to higher interest rates because there is more competition for the available funds. Higher interest rates can make it more expensive for people and companies to borrow money, which might reduce their spending and investment. For example, if a business wants to expand but faces higher borrowing costs, it might delay its plans, affecting overall economic growth. So, increased government borrowing can crowd out private borrowing, leading to less investment in the economy.
Detailed Explanation
When the government borrows more money, it needs to take loans from banks. Other options are incorrect because Some might think that more borrowing means less money available to lend; It's a common mistake to think that borrowing has no effect.
Key Concepts
government borrowing
Topic
Loanable Funds Market Dynamics
Difficulty
easy level question
Cognitive Level
understand
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