Sia
Question
Statistics
Posted 9 months ago
Which of the following best describes why the demand for loanable funds is downward sloping?
Choose 1 answer:
(A) At higher interest rates returns to investment will be higher
(B) Higher interest rates discourage spending and encourage savings
(C) Households prefer to keep some assets in a liquid form so that they can buy things
(D) At higher interest rates, the return to investments will be lower
(E) Higher interest rates discourage savings
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Answer from Sia
Posted 9 months ago
Solution by Steps
step 1
The demand for loanable funds is downward sloping because as the interest rate increases, the cost of borrowing funds also increases
step 2
Higher interest rates make borrowing more expensive, which discourages investment and reduces the quantity of loanable funds demanded
step 3
Therefore, the correct answer is the one that states that at higher interest rates, the return to investments will be lower
D
Key Concept
Demand for loanable funds and interest rates
Explanation
Higher interest rates increase the cost of borrowing, leading to lower demand for loanable funds.
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