If the market interest rate increased by 2.0%, what is the most likely effect on the amount of capital borrowed in the economy?

• A. The amount of capital borrowed will increase.
• B. The amount of capital borrowed will remain unchanged.
• C. The amount of capital borrowed will decrease.
• D. The amount of capital borrowed will double.

Answer: (C)

Verified step by step guidance

1. Understand the relationship between the market interest rate and the amount of capital borrowed. In microeconomics, the interest rate is the cost of borrowing capital.
2. Recall the law of demand: as the price of a good or service increases, the quantity demanded typically decreases. Here, the 'price' of borrowing capital is the interest rate.
3. When the market interest rate increases by 2.0%, borrowing becomes more expensive for firms and individuals.
4. Because borrowing is more costly, firms and individuals will reduce the amount of capital they borrow, leading to a decrease in the quantity of capital demanded.
5. Therefore, the most likely effect of an increase in the market interest rate is a decrease in the amount of capital borrowed in the economy.