Question

If the interest rate rises, the A. quantity of loanable funds demanded by firms decreases B. quantity of loanable funds demanded by government decreases C. quantity of loanable funds demanded by firms increases D. quantity of loanable funds demanded by government increases E. demand for loanable funds curve shifts to the right

Answer 1

Answer:

A. quantity of loanable funds demanded by firms decreases

Explanation:

Market for loanable funds represents a place of interaction between borrowers and lenders.

Quantity of loanable funds demanded represents need for the borrowers to avail funds.

Supply of loanable funds depends upon savings represented by the money banked by individuals. If consumption would be more, savings would be less and thus, supply of loananble funds will be less. This would raise the interest rate on loanable funds which would lead to a decrease in the quantity demanded of loanable funds by the firms.

Similarly, when the supply of loanable funds increases, this reduces the interest rate ,loans get cheaper and it becomes more convenient to avail loans and thus, quantity demanded of loanable funds by firms increase.