Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increased government spending raises demand for loans
B
Higher demand for loans leads to increased interest rates
C
Increased interest rates decrease the availability of loans
D
Reduced availability of loans negatively affects investment and consumption
Understanding the Answer
Let's break down why this is correct
Answer
Expansionary fiscal policy involves the government increasing spending or cutting taxes to boost the economy. When the government spends more, it often needs to borrow money, which increases the demand for loanable funds. This higher demand can lead to an increase in interest rates because more people are competing to borrow money. As interest rates rise, it may become more expensive for businesses and individuals to take out loans, which can slow down other investments. For example, if the government builds a new highway, it might borrow money to pay for it, causing interest rates to rise, making it harder for a small business to get a loan to expand.
Detailed Explanation
When the government spends more money, it needs to borrow. Other options are incorrect because Some might think that higher demand for loans always raises interest rates; It's a common mistake to think that higher interest rates always mean fewer loans.
Key Concepts
Loanable Funds Market Dynamics
Expansionary Fiscal Policy
Interest Rates
Topic
Loanable Funds Market Dynamics
Difficulty
hard level question
Cognitive Level
understand
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