Interest Rates Influence Saving and Borrowing Incentives

Steps:

• Higher interest rates provide greater returns, incentivizing more saving.
• Falling rates reduce these returns, discouraging saving and causing it to decrease.
• Lower rates also cut borrowing costs, making loans more attractive.
• Result: saving falls while borrowing rises to meet cheaper credit opportunities.

Why B is correct:

• B reflects the standard loanable funds model, where falling rates shift saving supply leftward (decrease) and borrowing demand rightward (increase) along their respective curves.

Why the others are wrong:

• A: Borrowing rises with lower rates due to reduced costs, not falls.
• C: Saving falls as returns diminish, not rises.
• D: Saving falls with lower returns, not rises.

Final answer: B