Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Demand for loans decreases, leading to lower interest rates
B
Demand for loans increases, leading to higher interest rates
C
Supply of loans decreases, resulting in higher interest rates
D
Supply of loans remains unchanged, but interest rates fluctuate wildly
Understanding the Answer
Let's break down why this is correct
Answer
If investors expect worsening economic conditions, they may become more cautious about lending money. This caution can lead to a decrease in the supply of loanable funds, as banks and other lenders might not want to take risks on loans that could default. Additionally, borrowers may feel less confident about taking out loans, which can reduce the demand for loans. For example, if a small business owner believes that sales will drop due to a poor economy, they might decide not to borrow money to expand their business. Overall, both supply and demand for loans can decrease, leading to higher interest rates and less borrowing in the loanable funds market.
Detailed Explanation
When investors think the economy will get worse, they worry about taking loans. Other options are incorrect because Some might think that bad news makes people want more loans to prepare; It's easy to think that fewer loans means less supply.
Key Concepts
Loanable Funds Market
Real Interest Rates
Economic Expectations
Topic
Loanable Funds Market Dynamics
Difficulty
easy level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.