Assume that a credit crisis causes a weak economy, and the Fed increases money supply. These conditions should cause
A)an increase in both the supply of and the demand for loanable funds.
B)a decrease in both the supply of and the demand for loanable funds.
C)a decrease in the supply of loanable funds and an increase in the demand for loanable funds.
D)an increase in the supply of loanable funds and a decrease in the demand for loanable funds.

Question

Quizplus · Accepted Answer

When the Fed increases the money supply during a weak economy, it typically does so to encourage lending and investment. This action increases the supply of loanable funds because there is more money available to lend. However, during a credit crisis, businesses and consumers may be less inclined to borrow due to uncertainty about the future, leading to a decrease in the demand for loanable funds.

Assume That a Credit Crisis Causes a Weak Economy, and the Fed