Question

a) Question 2a) Draw a graph representing a loanable funds market. Assume inelastic supply of loanable funds. Make sure to label axes, curves, and equilibrium. Write down equations for each of the curves. b) Interpret the slope of the demand for loanable funds curve. c) Interpret the slope of the supply of loanable funds curve. In 2020, the COVID pandemic has spread around the world. Some substantial policy changes in response to the adverse effects of the pandemic in the US included an increase in spending on publicly provided medical tests and provision of stimulus checks to public ($1200 per person). d) Focus on these two events only and illustrate them on your loanable funds model diagram. e) What changes to the equilibrium can you predict with this model going from (a) to (d) and what is the intuition for your predictions?

Answer 1

a) Loanable funds are the funds that are available for loans. The demand for loanable funds comes from the borrowers, and the supply fot the loanable funds comes from the savers in n economy.

The demand curve for loanable funds is downward sloping, while the supply curve is upward sloping. The interaction of the demand and supply curve brings aroung equilibrium in the market for loanable funds.

The inelastic supply curve for loanable fund suggests that for a change in the rate of interest, in the market, the quantity of supply of loanable funds would not change much.

b) The slope of the demand curve for loanable funds is downward sloping. The slope of the demand curve is downward due to the interest rates. When the interest rates are lower the borrowers would demand more money. A lower interest rate meand that the boroowere have to pay less as interest for takings loans. On the other hand when the interest rates are high, the demand is low for loanable funds.

c) The slope of the supply of loanable funds is positve. The upward slope of the supply curve is due to the rate of interest. When the rate of intr=erest is lower, the suppliers of loanable funds, i.e the savers won't be willing to supply a lot of loans as they would get less as interest for loaning out. On the other hand when the interest rate is higher, the quantity of loanable fund that will be supplied is larger, as now the savers get more as interest. This iterprets the upward slope of the suppy curve for loanable funds.

d) In the present pandemic situations, the savings of the people are draining, as the economy has apparently paused, people are now mainly living on their savings. This reduces the level of savings in the economy, so reduces the supply of loanable funds. This shifts the supply curve lefttwards.

e) As the supply curve shifts leftwards, the equilibrium interest rate inreases, while the quantity of loanable funds decreases.