Final answer:
In economics, when the demand for loanable funds increases and supply decreases, it typically causes interest rates to rise, making borrowing more expensive and potentially decreasing business investment and consumer spending.
Step-by-step explanation:
The scenario described involves the dynamics of supply and demand in the loanable funds market, which is a foundational concept in economics. If the demand for loanable funds increases while simultaneously the supply of loanable funds decreases, this would generally lead to an increase in the interest rate. As demand exceeds supply, borrowers are willing to pay more to obtain loans, pushing the interest rate up. Conversely, when the supply of loanable funds is high, those who have money to lend will compete for borrowers, bidding the interest rate down. Higher interest rates make it less attractive for firms to borrow for investment, while also discouraging consumer borrowing for items such as houses and cars. This could lead to a reduction in business investment and consumer spending, both of which are components of aggregate demand.