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Explain and illustrate graphically what effect a business cycle expansion should have on interest rates. (5 pts) 6. Jackson N
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1.

During business cycle expansion, firms and businesses are growing and expanding. The have optimistic views about the future of the economy along with increasing demand. In order to meet increasing demand, they start demanding more capital to fund their business ventures and expansions.

As a result of this, they increase their demand for loanable funds in the loanable funds market.

Keeping supply unchanged, an increase in the demand for loanable funds shifts the demand curve to the right, leading to an increase in the market interest rates.

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