Chapter 45, Problem 6MCQ

To determine

The correct option depicting the impact on the loanable funds market if the debt is financed.

Answer to Problem 6MCQ

Option a is correct.

Explanation of Solution

Explanation for the correct option:

a.

Due to the expansionary policy, there will be an increase in the interest rate and quantity of loanable funds. In the loanable funds market, when the government borrows to finance national debt, it means there is limited cash in the market. To ensure liquidity, interest rate increases and the quantity of loanable funds also increases. Therefore, option a is the correct answer.

Explanation for incorrect options:

b.

If the government borrows funds from the market, then interest rates are increased and the supply of loanable funds due to high-interest rates also increases. Therefore, option b is incorrect.

c.

Due to government borrowings interest rates will increase in order to ensure liquidity in the market. Therefore, option c is incorrect.

d.

There will be an increase in interest rates instead of a decrease in interest rates. Therefore, option d is incorrect.

e.

Due to increased borrowings from the government interest rates are increased to reduce the demand for loanable funds ensuring the increased supply of loanable funds. Therefore, option e is incorrect.

Economics Concept Introduction

International trade: International trade is an exchange of goods and services across nations. This is due to globalization and comparative advantage. It means goods are produced in one country and are sold in some other country.