During the financial crisis in 2007 and 2008, financial institutions believed that default risks were higher. As a result, there was ________ in the supply of loanable funds and a ________ in the real interest rate.
A) a decrease; fall
B) an increase; rise
C) an increase; fall
D) a decrease; rise

Question

Quizplus · Accepted Answer

During the financial crisis, financial institutions perceived a higher default risk, leading to a decrease in the supply of loanable funds. This decrease in supply, coupled with unchanged or possibly even increased demand for funds, would naturally lead to a rise in the real interest rate as lenders demand a higher return for the increased risk.

During the Financial Crisis in 2007 and 2008, Financial Institutions