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. This occurs because financial institutions are more willing to lend out money, possibly due to lower interest rates or reduced costs for the banks. With more loans available in the market, the quantity of loans made and received would likely increase.

Step by step solution

Scenario A: A rise in demand

When demand for loans increases, this means that there are more people who want to borrow money. As a result, the interest rate on loans might increase to meet the higher demand. In response to the higher interest rate, financial institutions might be more willing to lend out money. So, an increase in demand typically leads to an increase in the quantity of loans made and received.

Scenario B: A fall in demand

If there is a fall in demand, it means that fewer people are interested in borrowing money. This could lead to a decrease in the interest rate on loans. As a result, financial institutions might be less willing to lend out money, and the quantity of loans made and received would likely decrease.

Scenario C: A rise in supply

A rise in the supply of loans means that financial institutions are more willing to lend out money. This could be due to factors such as lower interest rates or reduced costs for the banks. With more loans available in the market, the quantity of loans made and received would likely increase.

Scenario D: A fall in supply

A fall in supply in the loan market indicates that financial institutions are less willing to lend out money. This could be because of factors such as higher interest rates or increased costs for the banks. With fewer loans available in the market, the quantity of loans made and received would likely decrease. Based on these scenarios, the answer to the exercise is: \( \boxed{\text{c. a rise in supply}} \) will lead to an increase in the quantity of loans made and received.

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