If investors sell their stocks and increase their money holdings due to a bad economy then
A. demand for loanable funds will increase.
B. demand for loanable funds will decrease.
C. supply of loanable funds will increase.
D. supply of loanable funds will decrease.
E. quantity demanded of loanable funds will decrease.
I know that the answer isn't C and I have a feeling that it's D because, from what I have learned involving monetary policy - When investors sell their bonds, there is a corresponding decrease in money supply. So it seems that it would similarly make sense with loanable funds. If anyone could help me out just to make sure, that would be fantastic. Thank you.
asd
The correct answer is A
To determine the correct answer, let's break down the scenario and analyze the relationship between investors selling stocks, money holdings, and the demand and supply of loanable funds.
Investors selling stocks and increasing their money holdings indicate a shift towards holding more cash instead of investing in stocks. This behavior is typically seen during a bad economy when investors seek safer assets.
Loanable funds refer to the supply and demand of funds available for borrowing or lending in financial markets. These funds are often used for investments or to finance economic activities.
Now, let's consider each option:
A. Demand for loanable funds will increase: This option suggests that the demand for borrowing will rise. However, in a bad economy, investors selling stocks and increasing money holdings signals a decrease in investment activities. Therefore, it is unlikely that the demand for loanable funds will increase.
B. Demand for loanable funds will decrease: This option aligns with the scenario described. When investors sell stocks and increase their money holdings, they are less likely to seek loans for investment purposes. As a result, the demand for loanable funds is likely to decrease.
C. Supply of loanable funds will increase: This option implies that suppliers of loanable funds, such as banks and other lenders, will have more funds available for borrowing. However, the actions of investors selling stocks and holding more cash do not directly impact the supply of loanable funds. Thus, it is not the correct answer.
D. Supply of loanable funds will decrease: This option suggests that the available funds for borrowing will decrease. Given that investors are selling stocks and not reinvesting the proceeds, there is less money flowing into financial markets. Therefore, the supply of loanable funds is likely to decrease.
E. Quantity demanded of loanable funds will decrease: This option focuses on the quantity of funds demanded by borrowers. It implies that there will be a decrease in borrowing due to investors' actions of selling stocks and increasing money holdings. As discussed earlier, this behavior aligns with the scenario and is a logical consequence, so it could be the correct answer.
After analyzing the options, we can conclude that the most likely correct answer is either B (demand for loanable funds will decrease) or E (quantity demanded of loanable funds will decrease). Both options describe the impact of investors selling stocks and increasing money holdings during a bad economy accurately.