Question 4 Chapter 13 Supply and demand for loanable funds
4. Supply and demand for loanable funds
The following graph shows the market for loanable fund
... [Show More] s in a closed economy. The upward-sloping orange
line represents the supply of loanable funds, and the downward-sloping blue line represents the demand for
loanable funds.
is the source of the demand for loanable funds. As the interest rate falls, the quantity of
loanable funds demanded .
Points: 1 / 1
Explanation: Close Explanation
The demand for loanable funds comes from households and firms that want to finance investment
spending by borrowing. A household purchasing a new home or a business purchasing new capital
Investment INTEREST RATE (Percent)
shortage
increasing
5%
Explanation: Close Explanation
Based on the graph you are given, at the interest rate of 4.5%, the quantity of loanable funds supplied
($450 billion) is less than the quantity of loanable funds demanded ($550 billion), resulting in a
shortage of loanable funds. Because of the shortage, lenders will find that they can safely increase the
interest rates they charge. As they do so, the return to saving rises, and the quantity of loanable funds
supplied will increase. At the same time, the higher cost of borrowing prices some borrowers out of the
market, and the quantity of loanable funds demanded declines. This process continues until the
interest rate reaches the equilibrium level of 5%, where the quantity of loanable funds demanded is
exactly equal to the quantity of loanable funds supplied.
Suppose the interest rate is 4.5%. Based on the previous graph, the quantity of loanable funds supplied is
than the quantity of loans demanded, resulting in a of loanable funds. This would
encourage lenders to the interest rates they charge, thereby the quantity of
loanable funds supplied and decreasing the quantity of loanable funds demanded, moving the market
toward the equilibrium interest rate of .
Points: 1 / 1
equipment might pay for the expenditure by borrowing in the market for loanable funds. The interest
rate represents the cost of borrowing money to finance investment expenditures. The demand for
loanable funds curve slopes downward. Households and firms will want to borrow a larger quantity of
loanable funds at lower interest rates, and a smaller quantity of loanable funds at higher interest rates.
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