Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
They reduce interest rates, leading to increased borrowing.
B
They increase interest rates to attract more savings.
C
They create a surplus of loanable funds, causing no change in the market.
D
They decrease the availability of funds, leading to decreased investment.
Understanding the Answer
Let's break down why this is correct
Answer
In the loanable funds market, financial intermediaries like banks play a key role in connecting savers with borrowers. When there is an increase in savings during an economic downturn, banks receive more deposits from people who are saving rather than spending. This increase in savings allows banks to have more money to lend out, which can lower interest rates because there is more supply of loanable funds. For example, if many people decide to save money instead of buying new cars, banks will have more funds available to lend to car manufacturers or other businesses. As a result, this can stimulate the economy by making it cheaper for businesses to borrow money and invest, helping to restore economic growth.
Detailed Explanation
When people save more money, banks have more funds to lend. Other options are incorrect because Some might think that banks need to raise rates to get more savings; It's a common mistake to think that having more savings means nothing changes.
Key Concepts
equilibrium in the loanable funds market
financial intermediaries
market adjustments
Topic
Loanable Funds Market Dynamics
Difficulty
hard level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.