In the loanable funds market, an increase in government borrowing will most likely decrease bond prices and increase interest rates.
The loanable funds market is a market where the exchange of loanable funds take place. Interest rate can be described as the cost of borrowing. It is the amount a lender demands from the borrower for use of her funds.
When government borrowing increases, there would be a rise in interest rate. This is because the demand for loanable funds is rising faster than the supply. This concept is known as crowding out. Due to the high interest rate, private individuals would be discouraged from borrowing. Thus, the supply of loanable funds would exceed the demand for loanable funds.
Here are the options:
A. decrease bond prices and increase interest rates.
B. decrease both bond prices and interest rates.
C. increase bond prices and decrease interest rates.
D. increase both bond prices and interest rates.
To learn more about interest rate, please check: brainly.com/question/14935026
#SPJ1
