Answer to Question #229647 in Macroeconomics for Prisca Mahlalela

Question

When government becomes a lender in the loanable funds market: 

(i) The supply of funds increases, and the interest rate decreases.

(ii) The supply of funds increases, and the interest rate increases.

(iii) The supply of funds decreases, and the interest rate decreases. 

(iv) The supply of funds decreases, and the interest rate increases.

A. only (i) is correct.

B. (i) and (ii) are correct.

C. only (iii) is correct.

D. (ii) and (iv) are correct.

Answer 1

Solution:

The correct answer is A. only (i) is correct.

i) The supply of funds increases, and the interest rate decreases.

When the government becomes a lender in the loanable funds market, there will be an increase in the supply of funds in the market, which will ultimately lead to a decrease in the interest rates.