Suppose business decision makers become more optimistic about future economic conditions and desire additional funds to expand their plant capacity. What is the likely effect on the loanable funds market?
A) The demand for loanable funds will increase, and the interest rate will rise.
B) The demand for loanable funds will decrease, and the interest rate will fall.
C) The supply for loanable funds will increase, and the interest rate will fall.
D) The supply for loanable funds will decrease, and the interest rate will rise.

Question

Quizplus · Accepted Answer

The increased optimism of business decision makers about future economic conditions will lead to an increase in their desire for funds to expand their plant capacity. This will cause an increase in the demand for loanable funds, leading to an increase in the interest rate in the loanable funds market. This is because there will be more borrowers competing for the same amount of funds, and lenders will demand a higher interest rate in compensation for the increased risk of lending to newer and less established borrowers.

Suppose Business Decision Makers Become More Optimistic About Future Economic