Final answer:
Economic changes such as an increase in the number of potential home buyers or growing confidence in the economy will increase demand for home loans, leading to higher equilibrium prices and quantities. Conversely, an increase in loan defaults can lead to a reduced supply, increasing interest rates and decreasing quantity. Government regulation changes that make lending easier will increase supply, reducing interest rates and increasing quantity.
Step-by-step explanation:
Impact of Economic Changes on the Equilibrium in the Financial Market for Home Loans :
To predict how various economic changes will affect the equilibrium price and quantity in the financial market for home loans, we must consider the basic principles of supply and demand.
- Demand Increase: When the number of people at the most common ages for home-buying increases or people gain confidence in the economy and their job security, demand for home loans will likely increase. This heightened demand tends to push up the equilibrium price and quantity of home loans.
- Supply Decrease: If banks find that more people than expected are not repaying loans, they may reduce the supply of home loans. This reduction in supply could raise the interest rates and lower the quantity of loans made.
- Regulatory Changes: If the federal government changes bank regulations to make it cheaper and easier for banks to offer home loans, the supply of home loans is likely to increase, lowering the interest rates and increasing the quantity of loans made.
In scenarios where demand rises (e.g., due to economic growth or an increase in the population of potential home buyers), we can expect a shift to the right in the demand curve, leading to a higher equilibrium price and quantity. In contrast, a supply reduction due to increasing default rates among borrowers or other factors would shift the supply curve to the left, resulting in higher interest rates and a lower equilibrium quantity. Conversely, an increase in supply due to regulatory changes would shift the supply curve to the right, likely reducing interest rates and increasing quantity.