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During the financial crisis of 2008 to 2009, the risk of lending and borrowing increased...

Question:

During the financial crisis of 2008 to 2009, the risk of lending and borrowing increased significantly. Use the supply and demand for loanable funds model to analyze the effects of increased risk on savings, investment, and the interest rate.

Loanable Funds Market:

The loanable funds market is a marketplace where the lenders and borrowers interact. The lenders are the private investors and the government sector. The borrowers are the households. The wedge between the lending and the borrowing is the interest rate.

Answer and Explanation:

When the risk of lending and borrowing increased in the market, both the lenders and the borrowers have a fear of lending and both would be less willing to take up new loans.

Thus, both the demand and the supply curve would shift to the left, such that the quantity of loanable funds decreases and the change in interest rate is ambiguous, as it depends on the magnitude of the shift of the curve.

Both the demand and the supply curve will shift to the left.


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Loanable Funds: Definition & Theory

from Introduction to Business: Homework Help Resource

Chapter 25 / Lesson 29
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