Final answer:
A shift in the supply or demand for money can raise or lower the equilibrium interest rate, affecting the quantity of funds loaned. Lower rates tend to stimulate economic growth by encouraging borrowing and spending, while higher rates can slow down the economy by discouraging these activities.
Step-by-step explanation:
Shifts in the demand or supply of money can have significant impacts on the equilibrium interest rate in the market. When the Federal Reserve enacts an expansionary monetary policy, the supply of loanable funds increases. This shift to the right in the supply curve results in a lower equilibrium interest rate and a higher quantity of funds loaned, as seen when the rate drops from 8% to 6% and the funds loaned increase from $10 billion to $14 billion. Conversely, a contractionary monetary policy shifts the supply curve to the left, causing the equilibrium interest rate to rise and the quantity of funds loaned to decrease, such as from an 8% to a 10% interest rate and from $10 billion to $8 billion loaned.These changes in interest rates can influence consumer and business spending, investment decisions, and economic growth. A lower interest rate generally stimulates borrowing and spending, which can boost economic activity. In contrast, higher rates tend to dampen borrowing, spending, and hence slow down the economy. Understanding these relationships is crucial for decision-makers both in the public and private sectors.