If an economic expansion in the economy caused an increase in the demand for loanable funds, what would be the effect on the interest rate and the quantity of funds loaned in the credit market?

	Interest rates would decrease and the quantity of funds loaned would increase
	Interest rates and the quantity of funds loaned would decrease
	Interest rates and the quantity of funds loaned would increase
	Interest rates would increase and the quantity of funds loaned would decrease

Expert Solution

As it can be seen in the diagram that initial equilibrium interest rate is determined by the equality of demand and supply curve of the loanable fund.

But when there is an economic expansion in the economy caused an increase in the demand for loanable funds, the demand curve of the loanable fund shifts rightward from D to D1, as a result equilibrium interest rate increases from i1 to i2 and equilibrium quantity of loanable fund increases from Q to Q1.

It means Interest rates and the quantity of funds loaned would increase.

Hence option third is the correct answer.

Rahul Sunny answered 2 years ago

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