Question

Firms, households, and governments use the credit market for borrowing. The credit demand curve shows the relationship

between the quantity of credit demanded and the real interest rate.
The credit demand curve slopes downward because​ ____________.
A. government borrowing increases when budget deficits​ increase, and vice versa.
B. a​ lender's ability to make loans falls as the real interest rate rises.
C. a higherhigher real interest rate reducesreduces a borrowing​ firm's profit and hence its willingness to borrow.
D. households seek to borrow more when their outlook for the future improves.

Answer 1

C) a higher real interest rate reduces a borrowing​ firm's profit and hence its willingness to borrow.

Step-by-step explanation:

Companies borrow money to leverage their projects, investments or regular business activities. When they borrow money, they do it to earn more money themselves, not just to make a bank or a bondholder earn money. Since the company must repay its loans, the profit it makes using the loans must offset the money it must pay back in interest.

E.g. I borrow $100 for my business and the bank charges me $7 in interest per year, so I must be able to use that money to increase my profit by more than $7 a year.