Why is the demand for loanable funds downward sloping?
A) People save less when the interest rate is low.
B) More people borrow money when interest rates are low than when they are high.
C) Fewer investment projects have returns that can beat higher interest rates,so people are more willing to invest at higher interest rates.
D) People save more when the interest rate is high.

Question

Quizplus · Accepted Answer

When interest rates are low, it becomes cheaper for individuals and businesses to borrow money for investment projects, leading to an increase in demand for loanable funds. Conversely, when interest rates are high, borrowing money becomes more expensive, causing a decrease in demand for loanable funds. This inverse relationship between interest rates and demand for loanable funds results in a downward-sloping demand curve. Option A and D are incorrect because they suggest that people save more or less as interest rates increase or decrease, respectively, but the demand for loanable funds pertains to borrowing, not saving. Option C is also incorrect because it refers to investment projects and is not directly related to borrowing.

Why Is the Demand for Loanable Funds Downward Sloping