Suppose there is news of rising unemployment.Which scenario is most likely?
A) Firms invest more in automation;the demand for loanable funds rises;interest rates rise;borrowing drops,which makes the anticipated bad times a reality.
B) Households save in anticipation of bad times;the supply of loanable funds rises;interest rates fall;firms take advantage of lower interest rates and make more investments,which stimulates the economy.
C) Householders spend more in anticipation that they won't have the money if they lose their job;the supply of loanable funds falls;interest rates rise;firms cut back on borrowing and spending,which brings about more unemployment.
D) Householders borrow more to prepare for unemployment;the demand for loanable funds rises;interest rates rise;business cuts back on investment,which slows the economy.

Question

Quizplus · Accepted Answer

When there is news of rising unemployment, households tend to save more in anticipation of bad times. This increases the supply of loanable funds, leading to a decrease in interest rates. Lower interest rates encourage firms to invest more, which stimulates the economy and helps to counter the rise in unemployment. Therefore, scenario B is the most likely in this situation. The other options either lead to a further increase in unemployment or a slowdown in the economy.

Suppose There Is News of Rising Unemployment