Final answer:
The equilibrium interest rate adjusts to equilibrate savings and borrowing in the capital financial market. A shift in the supply curve that reduces the supply of loanable funds leads to an increase in the interest rate.
Step-by-step explanation:
The equilibrium interest rate in the capital financial market is the interest rate at which the quantity of savings and borrowing in the market are equal. It is determined by the intersection of the supply and demand curves.
If the supply curve shifts so that $10 million less is supplied at every interest rate, the new equilibrium interest rate will increase.
This is because the reduced supply of loanable funds leads to increased competition among borrowers, driving up the interest rate.
The direction of the interest rate shift makes intuitive sense because a decrease in the supply of loanable funds, resulting from a shift of the supply curve to the left, leads to higher interest rates as borrowers compete for a limited supply of funds.