Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Increased government borrowing raises the demand for loanable funds, leading to higher interest rates.
B
Expansionary fiscal policy decreases the overall supply of loanable funds in the market.
C
Higher interest rates resulting from increased government borrowing can crowd out private investment.
D
Expansionary fiscal policy always leads to lower interest rates in the loanable funds market.
E
Increased government spending can stimulate economic activity even with higher interest rates.
Understanding the Answer
Let's break down why this is correct
Answer
Expansionary fiscal policy occurs when the government increases its spending or reduces taxes to stimulate the economy. When the government spends more, it often needs to borrow money, which increases the demand for loans in the loanable funds market. This higher demand can lead to an increase in interest rates because lenders may charge more for their loans when there is more competition for funds. For example, if the government decides to build new schools, it may borrow money from banks, making it more expensive for individuals and businesses to borrow funds for their own needs. Overall, expansionary fiscal policy can lead to higher interest rates and increased borrowing costs in the loanable funds market.
Detailed Explanation
All the statements misunderstand how expansionary fiscal policy works in the loanable funds market. Other options are incorrect because Some might think that more government borrowing always means higher demand for loans; It's a common mistake to think that government spending reduces the supply of loans.
Key Concepts
Loanable Funds Market
Government Borrowing
Interest Rates
Topic
Loanable Funds Market Dynamics
Difficulty
medium level question
Cognitive Level
understand
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