In the market for loanable funds,
A) an increase in available bank lending will increase the interest rate.
B) a decrease in saving will reduce the interest rate.
C) an increase in borrowing for investment will increase the interest rate.
D) a decrease in government borrowing will increase the interest rate.

Question

Quizplus · Accepted Answer

When there is an increase in borrowing for investment, the demand for loanable funds increases, leading to an increase in the interest rate. This is because borrowers are willing to pay a higher interest rate to access the limited funds available.

Note: A is incorrect because an increase in available bank lending would lead to a decrease in the interest rate as there is more supply of loanable funds. B is incorrect because a decrease in saving would increase the demand for loanable funds, leading to an increase in the interest rate. D is incorrect because a decrease in government borrowing would also decrease the demand for loanable funds, leading to a decrease in the interest rate.

In the Market for Loanable Funds