Question

All other things unchanged, a general decrease in the amount of government borrowing will typically: a increase interest rates. b reduce the supply of loanable funds. c raise the level of demand for loanable funds. d have no effect on the demand for loanable funds. e shift the loanable funds demand curve to the left.

Answer 1

The answer is option B) a general decrease in the amount of government borrowing will typically reduce the supply of loanable funds.

Step-by-step explanation:

When government decides to borrow, one of the ways they achieve this is by issuing debt in the form of bonds to raise money. They offer attractive interest rates to the public to increase participation and the monies paid in as investment will constitute loanable funds.

However, if there is a general decrease in the amount of government borrowing, there might reduce the incentives and when this happens, people are less enthusiastic about buying bonds.

This scenario will reduce the supply of loanable funds that would have been collated from the citizens investment.