Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The interest rate rises as borrowers compete for available funds.
B
The interest rate falls as lenders reduce their rates to attract more borrowers.
C
The interest rate remains unchanged as the supply adjusts perfectly to demand.
D
The interest rate becomes negative as lenders are willing to pay borrowers to take loans.
Understanding the Answer
Let's break down why this is correct
Answer
In the loanable funds market, when more people or businesses want to borrow money, the demand for loans increases. This higher demand means that lenders can charge more for the loans because more borrowers are competing for the available funds. As a result, the equilibrium interest rate, which is the rate where the amount of money borrowed equals the amount being saved, will rise. For example, if a new business wants to borrow money to expand and many other businesses want loans too, banks will raise interest rates because they know borrowers are eager to pay more to get the funds they need. Therefore, increased demand for loans leads to higher interest rates in the market.
Detailed Explanation
When more people want to borrow money, they compete for the same funds. Other options are incorrect because This option suggests that lenders lower rates to attract borrowers; This option implies that supply can always match demand perfectly.
Key Concepts
loanable funds
supply and demand
borrowers
Topic
Loanable Funds Market Dynamics
Difficulty
hard level question
Cognitive Level
understand
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