Chapter 4: Problem 7

Which of the following changes in the financial market will lead to a decline in interest rates: a. a rise in demand b. a fall in demand c. a rise in supply d. a fall in supply

Short Answer

Expert verified

The changes in the financial market that will lead to a decline in interest rates are: - b. a fall in demand - c. a rise in supply

Step by step solution

Analyze the effect of a rise in demand

A rise in demand for loans means more people want to borrow money. Due to higher demand, lenders can charge higher interest rates. Consequently, a rise in demand will lead to an increase in interest rates, not a decline.

Analyze the effect of a fall in demand

A fall in demand for loans means fewer people want to borrow money. With less demand, lenders need to lower their interest rates to attract borrowers. Hence, a fall in demand will lead to a decline in interest rates.

Analyze the effect of a rise in supply

A rise in the supply of money in the financial market means there is more money available to lend. With more money available, lenders will have to lower their interest rates to attract borrowers. Thus, a rise in supply will lead to a decline in interest rates.

Analyze the effect of a fall in supply

A fall in the supply of money in the financial market means there is less money available to lend. With less money available, lenders can charge higher interest rates because the funds are scarce. Therefore, a fall in supply will lead to an increase in interest rates, not a decline.

Identify the correct options

From the analysis above, we have concluded that: - A rise in demand leads to an increase in interest rates - A fall in demand leads to a decline in interest rates - A rise in supply leads to a decline in interest rates - A fall in supply leads to an increase in interest rates Hence, the correct options that lead to a decline in interest rates are: - b. a fall in demand - c. a rise in supply