Final answer:
The capital financial market is where financial instruments are exchanged and the equilibrium interest rate is determined. A shift in the supply curve due to a decrease in supplied financial capital leads to a higher equilibrium interest rate.
Step-by-step explanation:
The market in which financial instruments are exchanged and the equilibrium level of interest rate (r) is determined is known as the capital financial market. In this market, borrowers and lenders interact to determine the equilibrium interest rate and quantity of financial capital. The equilibrium interest rate is the rate at which the quantity of financial capital demanded is equal to the quantity of financial capital supplied. It is determined by the intersection of the demand and supply curves in the market.
If there is a shift in the supply curve, such as a $10 million decrease in supplied financial capital at every interest rate due to a shift in the perceptions of foreign investors, the new equilibrium interest rate and quantity will be different. The direction of the interest rate shift makes intuitive sense because a decrease in the supply of financial capital leads to a higher equilibrium interest rate in order to balance the decreased supply with the demand.