Question

Which of the following changes in the financial market will lead to a decline in interest rates:

a. a rise in demand

b. a fall in demand

c. a rise in supply

d. a fall in supply

Short answer

A fall in demand and rise in supply will lead to decline in interest rates.

Step-by-step solution

Step1. Introduction

Financial market is the interaction of demand and supply for capital. Capital is supplied by the ones who save, on which they expect a certain roi (rate of interest). The ones demanding are the ones who wish to invest, primarily in their business ventures. They too expect to pay a certain roi.

Step2. Explanation

a. A rise in demand in the financial markets implies that people need more capital, and hence the roi they are willing to pay shall push the interest rates up.

b. At a lower demand, people don't require much capital. To attract the demand, roi shall be pushed down.

c. Rise in supply indicates excess of funds available, thus pushing the roi down.

d. Fall in supply implies the supply of funds have contracted and people would be ready to pay higher roi, hence pushing the roi up.