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Question
Statistics
Posted 8 months ago
In response to a particularly severe stock market crash in Burginville, business optimism is at an all-time low, and the demand for capital has decreased.
What will be the impact of a decrease in the demand for capital on the market for loanable funds and the stock of capital in Burginville?
Choose 1 answer:
(A) Demand for loanable funds will decrease; stock of capital will increase.
(B) Supply of loanable funds will decrease; stock of capital will increase.
(c) Demand and supply of loanable funds will decrease; stock of capital will not be affected.
(D) Demand for loanable funds will decrease; stock of capital will decrease.
(E) Supply of loanable funds will increase; stock of capital will not be affected.
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Answer from Sia
Posted 8 months ago
Solution by Steps
step 1
Understand the economic context: A decrease in the demand for capital typically leads to a decrease in the demand for loanable funds because businesses are less inclined to borrow money for investment when their optimism about future profitability is low
step 2
Analyze the impact on the stock of capital: If the demand for capital decreases, less investment occurs, which over time leads to a decrease in the stock of capital. This is because the stock of capital is built up over time through investment
step 3
Relate the changes to the options provided: We need to find the option that correctly combines the decrease in the demand for loanable funds with the decrease in the stock of capital
Answer
D
Key Concept
Relationship between demand for capital, loanable funds, and stock of capital
Explanation
A decrease in the demand for capital leads to a decrease in the demand for loanable funds and, over time, results in a decrease in the stock of capital
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