For breakdowns in lending by financial institutions to affect the volume of funds flowing from savers to borrowers,
A)financial institutions must charge lower interest rates than other lenders.
B)financial institutions must charge higher interest rates than other lenders.
C)alternative sources of funds to borrowers must be imperfect substitutes for loans from financial institutions.
D)financial institutions must be subject to less regulation than other lenders.

Question

Quizplus · Accepted Answer

If alternative sources of funds to borrowers are perfect substitutes for loans from financial institutions, then breakdowns in lending by financial institutions would not affect the volume of funds flowing from savers to borrowers. However, if these alternative sources are imperfect substitutes, then a breakdown in lending by financial institutions could result in a reduction in the overall volume of funds available to borrowers, as there may not be enough alternative sources to fully compensate for the loss of lending from financial institutions. The interest rates charged by financial institutions and their regulatory environment may also play a role, but they are not as critical as the availability of alternative sources of funding.

For Breakdowns in Lending by Financial Institutions to Affect the Volume