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Usagi
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| Posted: 21 Nov 2011 at 22:41 | IP Logged
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Anyone please help me to understand this question?
I don't know why An increase in the demand for loan funds tend to increase interest rates.
In my opinion, demand increase makes price down so...it's makes interest decrease.(Demand curve) but my theory seems to be wrong. Please help me to explain this???
Bisk 50-51 49
What is the most likely impact of government borrowing to finance deficits that increases the demand for loan funds?
a. Decrease in the supply of loan funds
b. Decrease interest rates
c. Increase the ease with which businesses can borrow funds
d. Increase interest rate
Answer
An increase in the demand for loan funds tend to increase interest rates. An increases in the demand for loan funds has no direct effect on the supply of loan funds.With increased interest rates and more competition for available loan funds, business most likely have increase d difficulty borrowing.
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divyagovil1
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| Posted: 22 Nov 2011 at 04:35 | IP Logged
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Take it this way:
When a government must borrow, it has to attract lenders
somehow, which may require the government to offer higher
rates of return on its bonds. (higher rate of return
than the private sector)
When a government needs to borrow money to pay for its
deficit, private savers will find lending money to the
government more attractive than saving in private banks,
since the relative interest rate on government bonds is
likely to rise.
This should reduce the supply of loanable funds in the
private sector, making them more scarce and driving up
borrowing costs to households and firms.
__________________
Divya - CO State
Passed using Becker Review :
FAR - 04/11/09 - 94
BEC - 05/30/09 - 86
REG - 08/29/09 - 95
AUD - 11/21/09 - 92
Ethics - 2011
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helencpa
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| Posted: 22 Nov 2011 at 08:19 | IP Logged
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well if the govt also wants to take a loan, it means govt is in competition with in the market for money with households and firm, for sure the demand for money increases which will again increase the interest rate......which can lead to inflation as well......
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Usagi
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| Posted: 22 Nov 2011 at 08:26 | IP Logged
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Dear you too. Thank you very much for your explanation. This helps me a lot. Thank you very much!
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Topic: BEC-Government borrowing
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