An increase in the demand for loanable funds could be best explained by which of the following?

• A. A fall in the interest rate
• B. An increase in business investment opportunities
• C. A decrease in consumer savings
• D. A reduction in government borrowing

Answer: (B)

Verified step by step guidance

1. Understand the market for loanable funds: it is where borrowers demand funds and savers supply funds, with the interest rate as the price balancing supply and demand.
2. Recall that an increase in demand for loanable funds means that at every interest rate, borrowers want to borrow more funds than before.
3. Analyze each option to see which would cause an increase in demand for loanable funds: a fall in interest rate affects quantity demanded but is not a cause of demand increase; an increase in business investment opportunities means firms want to borrow more to invest, shifting demand right; a decrease in consumer savings affects supply, not demand; a reduction in government borrowing reduces demand, not increases it.
4. Conclude that the correct explanation for an increase in demand for loanable funds is an increase in business investment opportunities, as it directly raises the desire to borrow funds.
5. Summarize that shifts in demand for loanable funds come from changes in borrowers' willingness to invest or spend, while changes in interest rate cause movement along the demand curve.