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 labor market and the unemployment rate assuming that wages stay constant.

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Question : 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.

Solution : Interest rate is the price of the laonable funds that the suppliier of funds asks. When interest rate is below the equilibrium rate, lets say the actual interest rate is 10% and equilibrium interest rate is 18%, this means that price of loan is cheaper. So as per the law of demand, as price falls demamnd increases. So, there will be excess deamd for funds at the 10% interest rate, but suppliers of funds will be reluctant to supply funds at such a low rate. Therefore there will be excess demand but shortage of funds in the market. By seeing the continuous increase in the demand for funds, suppliers will take advantage of the situation and start raising interest rates, thus pulling it back to the equilibrium level of interest rate.

Hence, the loanable funds market will go back to an equilibrium interest rate when the actual interest rate is below the equilibrium interest rate.

Rahul Sunny answered 1 year ago

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