Businesses suddenly view investment projects as riskier. All else equal, what happens?

Question

BlackTom AI · Accepted Answer

Exploring the question, we need to trace what happens in the loanable funds framework when firms view investment projects as riskier.
Option 1: 'Supply for loanable funds decreases; r rises; quantity falls' If risk makes lenders less willing to supply funds, the supply curve would shift left, pushing the interest rate up and reducing quantity. However, the evidence for riskier investments primarily affects borrowers’ demand rather than lenders’ willingness to lend, so this description misstates the primary channel here.
Option 2: 'Supply for loanable funds increases; r falls; quantity rises' An increase in supply would push the interest rate down and raise quantity, but increased riskiness of investment projects doesn’t directly boost savers’ willingness to supply funds; the effect is more about reduced borrowing demand than increased savings supply.
Option 3: 'Demand for loanable funds increases; r rises; quantity rises' If projects are seen as riskier, firms would be more hesitant to undertake investment, not more eager. Consequently, there would be a weaker, not stronger, demand for funds, so this option describes the opposite of the expected effect.
Option 4: 'Demand for loanable funds decreases; r falls; quantity falls' This aligns with the standard intuition: riskier projects deter borrowing, shifting the demand curve for loanable funds left. With lower demand, the equilibrium interest rate falls, and the quantity of funds traded in the market also falls. The sequence matches the causal chain from higher risk to lower borrowing demand to lower price (interest rate) and lower traded quantity.
Overall, the reasoning hinges on distinguishing between shifts in supply versus demand: riskiness of investments primarily dampens demand for funds, not supply, and yields a lower interest rate alongside a smaller quantity in equilibrium.

Businesses suddenly view investment projects as riskier. All else equal, what happens?单项选择题

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