As a result of a recession, the default risk increases.How does this change affect the loanable funds market?
A)There is a rightward shift of the supply of loanable funds curve.
B)There is a rightward shift of the demand for loanable funds curve.
C)There is a movement up along the supply of loanable funds curve.
D)There is a leftward shift of the supply of loanable funds curve.
E)There is a movement down along the demand for loanable funds curve.

Question

Quizplus · Accepted Answer

As default risk increases, lenders become less willing to supply loanable funds, causing a leftward shift of the supply of loanable funds curve. This is because lenders require higher interest rates to compensate for the increased risk, which results in a decrease in the quantity of loanable funds supplied at any given interest rate.

As a Result of a Recession, the Default Risk Increases