Chapter 4: Problem 8

Which of the following changes in the financial market will lead to an increase in the quantity of loans made and received: a. a rise in demand b. a fall in demand c. a rise in supply d. a fall in supply

Short Answer

Expert verified

A rise in the supply of loans (option C) will lead to an increase in the quantity of loans made and received, as it generally results in lower interest rates, attracting more borrowers.

Step by step solution

Understanding Supply and Demand

In the financial market, the quantity of loans made and received depends on both the supply of loans from lenders (banks and other financial institutions) and the demand for loans from borrowers (individuals and businesses). We need to analyse each scenario's impact on the quantity of loans.

Analyse Option A: A Rise in Demand

A rise in demand for loans would mean that more borrowers are seeking loans. In response to this increased demand, lenders might increase the interest rates on loans, which would cause the quantity of loans to decrease. However, if lenders choose to maintain the same interest rates, the increased demand would lead to an increase in the quantity of loans made and received. The effect of a rise in demand, therefore, depends on how lenders react to it.

Analyse Option B: A Fall in Demand

A fall in demand for loans would mean that fewer borrowers are seeking loans. In response to this decreased demand, lenders might lower the interest rates on loans to attract more borrowers, but overall, the quantity of loans is likely to decrease as a result of reduced demand.

Analyse Option C: A Rise in Supply

A rise in supply of loans means that lenders have more funds available to lend. This would generally lead to lower interest rates, as lenders compete with one another to attract borrowers. With lower interest rates, the quantity of loans made and received is likely to increase, as more borrowers are enticed by the more attractive rates.

Analyse Option D: A Fall in Supply

A fall in supply of loans would mean that lenders have fewer funds available to lend. This would typically lead to higher interest rates, as lenders try to maximize their returns on the limited funds. With higher interest rates, the quantity of loans made and received is likely to decrease, as fewer borrowers would be able to afford these rates.

Conclusion

Based on our analysis, the correct answer is option C: a rise in supply. An increase in the supply of loans generally leads to lower interest rates and an increase in the quantity of loans made and received.

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