Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Borrowers are more likely to take loans
B
Borrowers are less likely to take loans
C
Borrowers will take the same amount of loans regardless of rates
D
Borrowers will only borrow if rates decrease
Understanding the Answer
Let's break down why this is correct
Answer
In the loanable funds market, an increase in interest rates usually makes borrowing more expensive. When interest rates rise, borrowers have to pay more money in interest on the loans they take out. This higher cost can lead to fewer people wanting to borrow money because they may not be able to afford the extra expense. For example, if a family wants to buy a house and the interest rate goes up, they might decide to wait to buy until rates come down, as their monthly payments would be higher. As a result, the overall demand for loans often decreases when interest rates increase.
Detailed Explanation
When interest rates go up, loans become more expensive. Other options are incorrect because Some might think higher rates encourage borrowing; It's a common belief that borrowing stays the same.
Key Concepts
interest rates
borrowers
Topic
Loanable Funds Market Dynamics
Difficulty
medium level question
Cognitive Level
understand
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