Final answer:
An increase in Americans holding cash would lead to an increase in interest rates due to a reduced supply of loanable funds. In the financial market, a rise in the supply of loanable funds would lead to lower interest rates, while a rise in demand would increase the quantity of loans.
Step-by-step explanation:
If Americans suddenly decide to hold more cash for transactions and precautionary reasons, this indicates an increased preference for liquidity and a reduced supply of funds available for lending in the financial market. As the available supply of loanable funds decreases, lenders will require a higher interest rate to part with their money. Therefore, the correct answer to the question is a) Increase in interest rates.
Financial Market Changes
When analyzing the financial market separately from the previously mentioned scenario, different dynamics apply:
- c) A rise in supply of loanable funds leads to a decline in interest rates because more funds are available for borrowers.
- A rise in demand, a fall in demand, or a fall in supply typically do not lead to a decline in interest rates.
- a) A rise in demand for loanable funds leads to an increase in the quantity of loans made and received as more individuals or businesses are looking to borrow.