As interest rates rise, there are fewer potential investments that will generate returns high enough to make the cost of paying back a loan worthwhile. This relationship is represented by the _______ in the market for loanable funds.
A) upward-sloping supply curve
B) downward-sloping supply curve
C) upward-sloping demand curve
D) downward-sloping demand curve

Question

Quizplus · Accepted Answer

A rising interest rate will reduce the quantity of loans demanded and increase the quantity of loans supplied, resulting in a downward-sloping demand curve and an upward-sloping supply curve in the market for loanable funds. This is because borrowing becomes more expensive, so fewer people are willing to borrow, and more people are willing to lend at higher interest rates.

As Interest Rates Rise, There Are Fewer Potential Investments That