Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases demand for loans, raising interest rates.
B
It decreases demand for loans, lowering interest rates.
C
It has no impact on loan demand or interest rates.
D
It creates a surplus of funds, leading to higher borrowing costs.
Understanding the Answer
Let's break down why this is correct
Answer
When businesses expect economic conditions to worsen, they often become more cautious about borrowing money. This decrease in confidence leads to a reduction in the demand for loans because companies may delay investments or expansion plans. As a result, the overall demand for loanable funds drops, which can lead to lower interest rates since lenders have less competition for their money. For example, if a company planned to build a new factory but decides to hold off due to uncertain future sales, it will not seek a loan, thus reducing the demand in the loanable funds market. This shift can impact the availability of loans for other borrowers as well, leading to a ripple effect in the economy.
Detailed Explanation
When businesses expect bad conditions, they borrow less money. Other options are incorrect because Some might think that less business activity means more borrowing; It's a common mistake to think nothing changes.
Key Concepts
Loanable Funds Market Dynamics
Real Interest Rates
Macroeconomic Expectations
Topic
Loanable Funds Market Dynamics
Difficulty
medium level question
Cognitive Level
understand
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