Question

if the domino effect occurs as a result of changes in the money supply, what will most likely happen as an immediate result of banks having more money to lend?
○ borrowing will decrease.
○ interest rates will decrease.
○ investing will decrease.
○ inflation will decrease.

Explanation:

To solve this, we analyze the relationship between bank lending capacity and economic factors:

• When banks have more money to lend, the supply of loanable funds increases. By the law of supply and demand in the loan market, an increase in supply (with constant demand) leads to a decrease in the "price" of borrowing, which is the interest rate.
• Borrowing is likely to increase (not decrease) as lower rates make borrowing cheaper.
• Investing is likely to increase (not decrease) as businesses/individuals borrow more to invest.
• Inflation is more likely to increase (not decrease) with more money in circulation from lending.

Answer:

B. Interest rates will decrease.