Question

As the interest rate falls, what happens to the quantity of loanable funds demanded?

1) It increases
2) It decreases
3) It remains the same
4) Cannot be determined

Answer 1

When the interest rate falls, the quantity of loanable funds demanded increases as borrowing costs are lower and more people are inclined to take out loans.

Step-by-step explanation:

As the interest rate falls, the quantity of loanable funds demanded increases. This is in accordance with the law of demand, which states that a lower cost of borrowing leads to a higher quantity demanded. When interest rates decrease, borrowing becomes cheaper, resulting in more individuals and businesses seeking loans.

The financial markets operate on this basic principle of demand and supply: lower interest rates tend to incentivize more borrowing as the cost of taking out loans is reduced.