Question

The total demand for funds curve slopes downward because a rise in the interest rate causes...

The total demand for funds curve slopes downward because a rise in the interest rate causes _____.

A. government borrowing to decrease B. business borrowing to decrease C. both government borrowing and business borrowing to decrease D. household saving to increase E. consumption spending to decrease

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Answer #1

Total demand curve for funds indicate the relationship between the interest rate and the quantity demanded of funds.

This curve is downward sloping. This downward slope indicates the inverse relationship between the interest rate and the quantity demanded of funds.

When interest rate rises, quantity demanded of funds decreases and vice-versa.

Quantity demanded of funds is constituted of the demand for funds made by businesses and the government.

A rise in interest rate increases the cost of borrowing and compels the businesses and government to decrease borrowing.

Thus,

The total demand for funds curve slopes downward because a rise in the interest rate causes both government borrowing and business borrowing to decrease.

Hence, the correct answer is the option (C).

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