Ceteris paribus, a decrease in the demand for loanable funds

Question

BlackTom AI · Accepted Answer

To understand the effect of a decrease in the demand for loanable funds, think about the loanable funds market where the demand curve for loans represents borrowers' desired borrowing at each real interest rate, and the supply curve represents savers' desired lending.
Option 1: 'drives the interest rate down' — When demand for loanable funds falls, the demand curve shifts left. With the same supply of savings, a lower demand for funds means borrowers are less eager to borrow at any given interest rate, which puts downward pressure on the equilibrium interest rate. This option aligns with standard supply-and-demand reasoning in the loanable funds market.
Option 2: 'drives the interest rate up' — This would occur if demand increased or supply decreased. A decrease in demand does the opposite, so this option is inconsistent with the described shift.
Option 3: 'might not have any effect on interest rates' — In general, a change in demand for loanable funds moves the equilibrium unless the shifts are perfectly offset by a change in supply. With ceteris paribus (holding other factors constant), a decrease in demand typically changes the rate, so saying there is no effect is unlikely and ignores the basics of market equilibrium.
Option 4: 'results from an increase in business prospects' — An improvement in business prospects would typically raise the demand for loanable funds (firms borrow more to finance expansion), not decrease it. Thus this option describes a different directional shift.
Option 5: 'results from a decrease in the level of savings' — A decrease in savings reduces the supply of loanable funds, which would push the interest rate up, not down, assuming demand remains unchanged. This option confuses a shift in supply with the effect of a shift in demand.
Overall, the most consistent interpretation with a decrease in demand for loanable funds is a lower equilibrium interest rate, given the standard market equilibrium framework. The other choices either describe opposite effects, rely on offsetting factors that aren’t specified, or misattribute the cause to a supply-side change rather than a demand-side one.

Ceteris paribus, a decrease in the demand for loanable funds单项选择题

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