Each of the following factors will tend to INCREASE the supply of Loanable Funds except Individuals...

Each of the following factors will tend to INCREASE the supply of Loanable Funds except
1. Individuals save more
2. Lenders are optimistic about future business prospects
3. The Federal Reserve increases interest rates
4. The Federal Reserve conducts open-market operations and buys government securities

Solutions

Expert Solution

Among the option given, the correct Ans is Except when Federal reserve increases interest rates.

The reason for same is :

In case individuals save more, the collective savings when deposited in banks will increase the supply of loanable funds in the economy.

When lenders are optimistics about future business prospects, they believe that the businesses shall in general be able to generate enough cash flows and profits so as the service back the interest and principal repayment requirements. Thus this will lead to increased confidence among the bankers to lend which will increase the supply of loanable funds.

Also in case the Federal reserve increases the interest rates, the cost of loans will increase. Thus businesses or individuals might be inclined to also evaluate and look for other sources of finance which can decrease the loanble funds in the market.

Also in case the Federal reserve buys back government securities, Funds will flow from the government to economy which will increase the supply of loanable funds in the market.

jeff jeffy answered 1 year ago

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