when there is excess demand in the loanable funds market, which of the following will occur?
When there is excess demand in the loanable funds market, what will occur?
Answer:
When there is excess demand in the loanable funds market, several outcomes can occur. Some of the possible consequences include:
1. Increase in Interest Rates: One of the primary effects of excess demand in the loanable funds market is an increase in interest rates. As demand for loans surpasses the available funds, lenders may raise interest rates to balance the market.
2. Tightening of Credit Conditions: Excess demand can lead to a tightening of credit conditions. Lenders may become more selective in approving loans, making it harder for borrowers to access funds.
3. Crowding Out Effect: Excessive demand for loans can also result in crowding out effect, where increased government borrowing due to deficits can limit the availability of funds for private investment.
4. Shift in Investment Patterns: Excess demand in the loanable funds market can cause a shift in investment patterns. Businesses may postpone or reduce investment projects due to higher interest rates, impacting economic growth.
Overall, excess demand in the loanable funds market can have significant implications for interest rates, credit availability, government borrowing, and investment decisions.