Final answer:
The loanable funds market graph starts with an initial equilibrium at interest rate Ro and quantity Qo. A rise in business confidence shifts the demand curve right, leading to a new equilibrium with a higher interest rate r1 and increased quantity Q1 of loanable funds.
Step-by-step explanation:
To draw a correctly labeled graph of the loanable funds market, we begin with two axes: the vertical axis represents the interest rate (r), and the horizontal axis represents the quantity of loanable funds (Q). The supply curve (S) slopes upwards, reflecting the positive relationship between the interest rate and the quantity of funds supplied. The demand curve (D) slopes downwards, indicating the negative relationship between the interest rate and the quantity of funds demanded. At the initial equilibrium (Eo), the interest rate is Ro and the quantity of financial investment is Qo.
When business confidence rises, firms anticipate better future profits and therefore desire to invest more. This shifts the demand curve for loanable funds to the right, from D to D1. As a result, the new equilibrium (E1) is established at a higher interest rate (r1) and a greater quantity of loanable funds (Q1).
The new graph reflects these changes: the original demand curve (D) and supply curve (S) intersect at the original equilibrium (Eo) with interest rate Ro and quantity Qo. After the shift in demand, the new demand curve (D1) intersects with the supply curve (S) at the new equilibrium (E1) with interest rate r1 and quantity Q1.