Suppose there is news of rising unemployment. Which scenario is most likely?
A) Firms invest more in automation, the demand for loanable funds rises, interest rates rise, and borrowing falls, all of which makes the anticipated bad times a reality.
B) Households save in anticipation of bad times, the supply of loanable funds rises, interest rates fall, and firms take advantage of lower interest rates and make more investments, all of which stimulates the economy.
C) Householders spend more in anticipation that they will not have the money if they lose their jobs, the supply of loanable funds falls, interest rates rise, and firms cut back on borrowing and spending, all of which brings about more unemployment.
D) Householders borrow more to prepare for unemployment, the demand for loanable funds rises, interest rates rise, and businesses cut back on investment, all of which slows the economy.

Question

Quizplus · Accepted Answer

In times of rising unemployment, households tend to save more as a precautionary measure, which increases the supply of loanable funds. This, in turn, leads to a fall in interest rates, making it easier for firms to borrow and invest, which stimulates the economy and creates job opportunities. Therefore, option B is the most likely scenario. The other options suggest actions that would lead to a contraction in economic activity, exacerbating unemployment.

Suppose There Is News of Rising Unemployment