Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The supply decreases
B
The supply remains constant
C
The supply increases
D
The supply becomes negative
Understanding the Answer
Let's break down why this is correct
Answer
When interest rates increase, the supply of loanable funds can change in a few important ways. Higher interest rates mean that lenders can earn more money from the loans they give out, which encourages more people and institutions to save their money to take advantage of these higher returns. As a result, banks and other financial institutions may have more funds available to lend. For example, if a bank offers a higher interest rate on savings accounts, more people may choose to deposit their money instead of spending it, increasing the total amount of loanable funds. Therefore, when interest rates rise, the overall supply of money available for loans tends to increase as well.
Detailed Explanation
When interest rates go up, more people want to save money. Other options are incorrect because Some might think higher interest means less money to lend; It's a common mistake to think supply stays the same.
Key Concepts
supply of loanable funds
Topic
Loanable Funds Market Dynamics
Difficulty
easy level question
Cognitive Level
understand
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