Question

Money Supply Money Demand Interest Rate Investment (at Interest Rate Shown)

$ 400 $60 2% $700
$400 500 3 600
$400 400 4 500
$400 300 5 300
$400 200 6 200

answer the question based on the information in the table. the equilibrium interest rate in this economy is
a. 5 percent.
b. 3 percent.
d. 6 percent.
b. 4 percent.

Answer 1

The equilibrium interest rate in the economy is 4 percent, identified by the money supply and money demand being equal at this rate. A shift due to foreign investor perceptions causing $10 million less to be supplied at every interest rate would result in a rise in the interest rate to reach a new equilibrium.

Step-by-step explanation:

Based on the information in the table, the equilibrium interest rate in the economy is at the point where the money demand equals the money supply. With the given data, we identify the equilibrium at an interest rate of 4 percent because this is where the money demand of $400 matches the money supply of $400. At this point, there is no surplus or shortage of money, hence equilibrium is achieved. However, when the supply curve shifts with $10 million less supplied at every interest rate due to a shift in perceptions of foreign investors, the supply of loans decreases, which will cause the interest rate to rise in order to reach a new equilibrium. The exact new interest rate and quantity would require additional information to calculate.