Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increased government borrowing raises the demand for funds, leading to higher interest rates.
B
Increased government borrowing reduces the money supply, causing interest rates to rise.
C
Increased government borrowing makes banks less willing to lend money, which raises interest rates.
D
Increased government borrowing decreases demand for loans from the private sector, lowering interest rates.
Understanding the Answer
Let's break down why this is correct
Answer
When the government borrows more money, it takes a larger share of the money available in the loanable funds market. This increased demand for loans means that banks and lenders have fewer funds to lend to businesses and individuals. As a result, lenders may raise interest rates to manage the limited supply of money they have, making borrowing more expensive. For example, if the government needs to borrow $100 billion for a new project, this demand can push interest rates up, meaning that businesses might have to pay more to borrow money for their own investments. Overall, higher government borrowing can lead to higher interest rates, which can slow down economic growth.
Detailed Explanation
When the government borrows more money, it needs to take loans from the same pool of funds that everyone else uses. Other options are incorrect because Some might think that borrowing less money means there is less money available; It's a common mistake to think that banks will lend less when the government borrows more.
Key Concepts
Loanable Funds Market
Government Borrowing
Interest Rates
Topic
Loanable Funds Market Dynamics
Difficulty
easy level question
Cognitive Level
understand
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