Asked by Myranda Jimenez on Jul 22, 2024
Verified
The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.
Present Value
The current value of a future sum of money or stream of cash flows given a specified rate of return.
Loanable Funds
The funds available within an economy for borrowing, influencing interest rates and capital availability.
Interest Rate
Fees assessed by a lending party on a borrowing party for asset usage, expressed in terms of the principal's percentage.
- Appreciate the linkage among interest rates, present value, and future value.
- Recognize how the present value concept affects the quantity of loanable funds demanded.
Verified Answer
SM
Sarah MiddletonJul 27, 2024
Final Answer :
True
Explanation :
The concept of present value indicates that a dollar received in the future is worth less than a dollar today due to the opportunity cost of not having that dollar to invest. As interest rates increase, the cost of borrowing (and thus the future repayment amount) increases, making loans less attractive and decreasing the quantity of loanable funds demanded.
Learning Objectives
- Appreciate the linkage among interest rates, present value, and future value.
- Recognize how the present value concept affects the quantity of loanable funds demanded.