Question

In the market for loanable funds, suppose the current interest rate is 5%. At a rate of 5%, investors wish to borrow $100 million and savers wish to save $125 million. We would expect:

Answer 1

We would expect interest rate to fall below 5%

Step-by-step explanation:

Given demand for loanable funds (by borrowers) at $100 million, and supply (by savers) at $125 million, there is excess supply in the market for loanable funds, a trend that will push down pricing (current interest rate of 5%) to a level where demand is equal to supply (this level will be the equilibrium). This is in accordance with the law of demand and supply.