If an economic expansion in the economy caused an increase in the demand for loanable funds, what would be the effect on the interest rate and the quantity of funds loaned in the credit market?

Question

Quizplus · Accepted Answer

An economic expansion would lead to an increase in the demand for loanable funds as businesses and consumers would want to borrow more money to fund their spending and investment. This increase in demand for loanable funds would increase the interest rate as lenders would want to charge more for their money. However, this would also increase the quantity of funds loaned out as higher interest rates would incentivize lenders to provide more loans. Therefore, both the interest rate and the quantity of funds loaned would increase.

If an Economic Expansion in the Economy Caused an Increase