Government Borrowing and the Loanable Funds Market

Question

How does a reduction in domestic government borrowing, resulting from fiscal consolidation, impact the loanable funds market?

Accepted Answer

It causes a leftward shift in the demand for loanable funds, which lowers the equilibrium interest rate.

Answer

It causes a leftward shift in the supply of loanable funds, thereby increasing the equilibrium interest rate.

Answer

It simultaneously shifts both supply and demand to the right, leaving the interest rate unchanged.

Answer

It causes a rightward shift in the supply of loanable funds, raising the equilibrium interest rate.