Question
In: Economics
Explain why the loanable funds market will return to an equilibrium interest rate when the actual...
Explain why the loanable funds market will return to an equilibrium interest rate when the actual interest rate is below the equilibrium interest rate.
Solutions
Expert Solution
The loanable funds market will return to equilibrium due to the forces of demand and supply. The lower interest rates will itself force borrowers to demand more at lower rate, where at the same time savers of capital are less inclined to supply funds at lower rate. This will cause a situation of shortage of funds where demand for funds exceeds the supply. The result will be increase in interest rate until savers are ready to save more and borrowers are demanding less. The equilibrium interest rates starts to rise and will reach a point where demand for funds is equal to supply of funds. The graph below show that at 2% interest rate, demand exceeds the supply by 7 Billion $. But as borrowers ready to demand more, putting upward pressure on interest rates and reaching equilibrium point where interest rate is 3% and quantity supplied / demanded is 5 Billion $
Rahul Sunny answered 2 years agoRelated Solutions
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.
The interest rate is the price of loanable funds in financial markets, and the equilibrium interest...
The interest rate is the price of loanable funds in financial
markets, and the equilibrium interest rate is the price that
equates the demand for and supply of loanable funds. Interest rates
may move from an existing equilibrium level to a new equilibrium
level as the result change in the supply of or demand for loanable
funds. For example, if the quantity of loanable funds being
demanded increases due to new business opportunities, suppliers of
loanable funds will need to...
1. Please elaborate on why the loanable funds market will go back to an equilibrium interest...
1. Please elaborate on why the loanable funds market will go
back to an equilibrium interest rate when the actual interest rate
is below the equilibrium interest rate.
2. Would frictional unemployment ever benefit or be at least
good for the economy? Explain why it would or would not be.
3. In April of 2020, the federal government started to provide
around $600 per week in extra unemployment insurance payments to
people. Show graphically and explain how this impacts the...
Using the loanable funds theory, explain what will happen to the real equilibrium interest rate under...
Using the loanable funds theory, explain what
will happen to the real equilibrium interest rate under the
following scenarios:
(In your discussion describe or show with a graph the change in
the supply curve for loanable funds and the change in its
intersection with the demand curve for loanable funds).
(1) There is a decrease in the money supply with the Federal
Reserve engaging
in a contraction policy.
(2) The U.S. government has a large deficit that its need to...
Using the loanable funds theory, explain what will happen to the real equilibrium interest rate under...
Using the loanable funds theory, explain what
will happen to the real equilibrium interest rate under the
following scenarios: (In your discussion describe or show
with a graph the change in the supply curve for loanable funds and
the change in its intersection with the demand curve for loanable
funds).
(1) There is a decrease in the money supply with the Federal
Reserve engaging in a contraction policy.
(2) The U.S. government has a large deficit that its need to...
Under the loanable funds theory, the equilibrium interest rate is determined by the interaction between the...
Under the loanable funds theory, the equilibrium interest rate
is determined by the interaction between the demand for and the
supply of funds from financial market participants, mainly the
household sector, the business sector and the government
sector.
Holding other factors constant, predict the change in domestic
interest rates that would occur when facing each of the following
situations. Explain your predictions in detail.
i The total wealth of local financial market participants
increases.
ii The default risk of loans...
Initially, in a borrowing and lending market, or a loanable funds market, there is an equilibrium.
Initially, in a borrowing and lending market, or a loanable
funds market, there is an equilibrium. Suppose entrepreneurs'
aggregate expectations are that the economy is going to be good
next year (i.e. opportunities for investment). What is likely to
happen to the equilibrium interest rate under the following
scenarios: 1. There is no change in the loan supply curve; 2.
Potential lenders disagree with entrepreneurs, lenders view the
future economic outlook as negative/riskier. Answer both cases
using the theory of loanable fund...
Initially, in a borrowing and lending market, or a loanable funds market, there is an equilibrium....
Initially, in a borrowing and lending market, or a loanable
funds market, there is an equilibrium. Suppose entrepreneurs'
aggregate expectations are that the economy is going to be good
next year (i.e. opportunities for investment). What is likely to
happen to the equilibrium interest rate under the following
scenarios: 1. There is no change in the loan supply curve; 2.
Potential lenders disagree with entrepreneurs, lenders view the
future economic outlook as negative/riskier. Answer both cases
using the theory of...
Show a loanable funds graph with a negative equilibrium interest rate. What kind of surplus or...
Show a loanable funds graph with a negative equilibrium interest
rate. What kind of surplus or shortage exists if the ZLB binds?
Show a loanable funds graph with a negative equilibrium interest rate. What kind of surplus or...
Show a loanable funds graph with a negative equilibrium interest
rate. What kind of surplus or shortage exists if the ZLB binds?
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