Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases
B
It decreases
C
It remains unchanged
D
It fluctuates randomly
Understanding the Answer
Let's break down why this is correct
Answer
In the loanable funds market, the equilibrium interest rate is determined by the supply and demand for funds. When private sector borrowing increases, it means that more individuals and businesses are seeking loans to finance their projects or purchases. This higher demand for loans usually leads to an increase in the interest rate, as lenders want to charge more for the money they are providing. For example, if a company wants to borrow money to expand its operations, it competes with other borrowers, which can drive up the cost of borrowing. Consequently, the equilibrium interest rate rises to balance the increased demand for loans with the available supply of funds.
Detailed Explanation
When private sector borrowing increases, more people want to borrow money. Other options are incorrect because Some might think that more borrowing means lower rates; It's a common mistake to think that more borrowing doesn't change rates.
Key Concepts
equilibrium in the loanable funds market
private sector borrowing
Topic
Loanable Funds Market Dynamics
Difficulty
medium level question
Cognitive Level
understand
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