What is the impact on the loanable funds market if the quantity of loanable funds supplied...

What is the impact on the loanable funds market if the quantity of loanable funds supplied is less than the quantity demanded?

Solutions

Expert Solution

In the loanable funds market, there are borrowers and savers, borrowers create the demand for loanable funds and savers create the supply of loanable funds. Here the quantity of loanable funds is supplied by the savers in the economy that deposit the money in banks and the quantity of loanable funds is demanded by the borrowers in the economy that lend the money from the bank. Here interest rate determines the equilibrium in the loanable funds market (Just like prices determine the equilibrium in the goods market).

Equilibrium interest rates are achieved at the point where the quantity demanded of loanable funds equals the quantity supplied of loanable funds. But when the quantity of loanable funds supplied is less than the quantity demanded (or when the savers do not deposit enough money that the borrowers demand), then it leads to a rise in interest rates in the economy (due to shortage of loanable funds).

Thus, when the quantity of loanable funds supplied is less than quantity demanded, the interest rates rises in the market of loanable funds.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Suppose the interest rate is 3.5%. Based on the previous graph, the quantity of loanable funds supplied is

4. Supply and demand for loanable funds The following graph shows the market for loanable funds 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 supply of loanable funds. As the interest rate falls, the quantity of loanable funds supplied _______ Suppose the interest rate is 3.5%. Based on the previous graph, the quantity of loanable funds supplied...

Derive the Classical Model’s loanable funds market. What is the impact of a change in planned...

Derive the Classical Model’s loanable funds market. What is the impact of a change in planned saving upon the real interest rate, real saving, real investment and real aggregate expenditures?

Which of the following would directly lead to the quantity of loanable funds in the market...

Which of the following would directly lead to the quantity of loanable funds in the market for loanable funds falling? a. Social security is ended, leaving individuals on the hook for paying all their costs during retirement. b. A war breaks out which galvanizes individuals to buy war bonds (bonds that fund the government's military spending). c. A new tax is introduced that taxes all types of savings (bonds, stocks, cds, mutual funds, etc.) by taking 50% of all interest...

Use the loanable funds market, explain what happens to the equilibrium interest rate and equilibrium quantity...

Use the loanable funds market, explain what happens to the equilibrium interest rate and equilibrium quantity of loanable funds when: a, Households are optimistic about future economic condition and want to save less.

In the open-economy market for loanable funds, the demand for loanable funds comes from A. domestic...

In the open-economy market for loanable funds, the demand for loanable funds comes from A. domestic investment B. the sum of domestic investment and net capital outflow C. net capital outflow D. national savings

The market for loanable funds and government policy The following graph shows the market for loanable...

The market for loanable funds and government policy The following graph shows the market for loanable funds. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Treat each scenario separately by resetting the graph to its original state before examining the effect of each individual scenario. (Note: You will not be graded on any changes you make to the graph.) Demand Supply INTEREST RATE (Percent) LOANABLE FUNDS (Billions...

If an economic expansion in the economy caused an increase in the demand for loanable funds, what would be the effect on the interest rate and the quantity of funds loaned in the credit market?

If an economic expansion in the economy caused an increase in the demand for loanable funds, what would be the effect on the interest rate and the quantity of funds loaned in the credit market?Interest rates would decrease and the quantity of funds loaned would increaseInterest rates and the quantity of funds loaned would decreaseInterest rates and the quantity of funds loaned would increaseInterest rates would increase and the quantity of funds loaned would decrease

Question