Think of it like this, instead of going out and spending money, which will cause others to deposit money @ banks which will lead an increase in loanable funds, the money will stay @ only one bank. Even though it kinda of increases the amount of loanable funds, it only increases it marginally, A isn’t neccessary the only right answer but its the best answer
getterdone Wrote: ------------------------------------------------------- > Think of it like this, > > instead of going out and spending money, which > will cause others to deposit money @ banks which > will lead an increase in loanable funds, the money > will stay @ only one bank. > > Even though it kinda of increases the amount of > loanable funds, it only increases it marginally, > A isn’t neccessary the only right answer but its > the best answer it makes more sense to me thanks getterdone
no problem man
I think what they are saying (although a bit debatable) is that due to fear of losing jobs, people sell their investments (like bonds and stocks) to raise cash in case they need it. If true, then that of course will increase demand for money while supply of loanable funds remain constant. That (for fun) will raise interest rates ==> reduce aggregate demand ==> raise unemployment ==> reduce GDP ==> raise inflation ==> cause Fed to raise interest rates fuurther ==> later reducing inflation ==> increasing aggregate demand ==> and pushing economy back to where it was before the fear took place!
for bonus points what parts of AD will be most affect by a rise in interest rates?
That’s like flying from NY to SF with a stop in Delhi:)
C
If people fear job loss, everyone hoards money, no one wants to lend much b/c of the risk of people failing. I like Dreary’s explanation too. Oh, and I picked A!! Woohoo! I think I am getting better at Econ, at least better than the 50% I have been averaging on the CFAi exams.