Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It decreases borrowing costs as more funds are available.
B
It increases borrowing costs due to higher demand.
C
It has no effect on borrowing costs.
D
It leads to increased lending restrictions.
Understanding the Answer
Let's break down why this is correct
Answer
Increased liquidity in the money market means that there is more money available for banks and financial institutions to lend. When banks have more cash on hand, they can offer loans at lower interest rates because they are eager to lend out this extra money. This results in lower short-term borrowing costs in credit markets, making it cheaper for businesses and individuals to take out loans. For example, if a small business wants to borrow money to buy new equipment, lower interest rates due to increased liquidity will make it more affordable for them to do so. Overall, when liquidity rises, borrowing becomes easier and less expensive, which can help stimulate economic activity.
Detailed Explanation
When there is more money available in the market, it becomes cheaper to borrow. Other options are incorrect because Some might think that more money means higher demand, which raises costs; It's a common belief that liquidity doesn't change costs.
Key Concepts
liquidity
short-term borrowing
credit markets
Topic
Money Market Dynamics
Difficulty
hard level question
Cognitive Level
understand
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