What is a likely consequence of a shrinking economy on borrowing?

A shrinking economy typically leads to decreased consumer and business confidence. When economic activity contracts, individuals and firms may become more cautious about taking on debt, even if borrowing rates are lower. The fear of uncertain income, potential job losses, or declining sales makes borrowing less attractive despite cheaper loans. People tend to prioritize saving over spending in tough economic times, which further contributes to a reduction in borrowing.

In contrast, the other choices suggest scenarios that are less plausible in a shrinking economy. For instance, increased rates due to high demand would contradict the usual behavior of lenders who may actually lower rates to stimulate borrowing during economic downturns. The notion that more companies will seek loans due to increased confidence also doesn’t align with the typical reaction to a shrinking economy, as companies often cut back on expansion and investment in such circumstances. Lastly, the idea that borrowing remains constant irrespective of economic conditions overlooks the natural tendency for borrowing behavior to shift in response to economic signals.