Sia
Question
Statistics
Posted 7 months ago
Which of the following best describes the impact of a decrease in the demand for capital on the interest rate and the quantity of loans made?
Choose 1 answer:
(A) Interest rate increases; quantity of loans made decreases.
(B) Interest rate decreases; quantity of loans made is not affected.
(c) Interest rate increases; quantity of loans made decreases.
(D) Interest rate increases; quantity of loans made increases.
(E) Interest rate decreases; quantity of loans made decreases.
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Answer from Sia
Posted 7 months ago
Solution by Steps
step 1
Understand the basic economic principle that when demand for a good or service decreases, the price for that good or service typically decreases as well. In the context of the loanable funds market, the 'price' is the interest rate
step 2
Apply this principle to the demand for capital: a decrease in the demand for capital would lead to a decrease in the interest rate, as lenders would have to lower rates to attract borrowers
step 3
Recognize that the quantity of loans made is also affected by the demand for capital. If the demand decreases, fewer loans are made, because there are fewer borrowers in the market for loans
Answer
E
Key Concept
Loanable Funds Market Equilibrium
Explanation
In the loanable funds market, a decrease in demand for capital leads to a lower equilibrium interest rate and a decrease in the quantity of loans made.
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