Question

Evaluate the following statement: "A higher interest rate will cause the borrowers to increase their borrowings and will cause lenders to increase their lending."

Ideal answer is one paragraph long and includes the necessary graphs.

Answer 1

Capital is one of the important factors of production and it is utilized by paying the interest rate. The interest rate is decided by the market forces and the equilibrium interest rate is the one where the investors are willing to borrow and lenders are willing to loan.
The statement mentioned in the question is false and the actual situation is completely opposite of that. A higher interest rate will increase the loanable funds in the market because the supply curve tends to be upward sloping. Lenders will be willing to lend more at a higher interest rate but the demand curve tends to be downward sloping. It means the investors will be willing to borrow less in the situation of higher interest rates. Investors consider the higher interest rate as a higher cost which pushes the required rate of return higher and they reduce the borrowing.
So it is true that at a higher interest rate, the supply of loanable funds will be higher but borrowing will be lower.