Final answer:
To determine the equilibrium interest rate, find where the demand and supply curves intersect on a graph. The equilibrium point gives the rate and quantity of financial investment at equilibrium. A leftward shift in the supply curve due to changing foreign investor perceptions will result in a higher interest rate and lower investment quantity.
Step-by-step explanation:
To determine the equilibrium interest rate from a graph of the demand for money, you can follow these steps:
- Identify the demand curve (D) for money and the supply curve (S) for money on the graph. The demand curve typically slopes downwards, indicating that at lower interest rates, the quantity of money demanded increases. Conversely, the supply curve generally slopes upwards, indicating that at higher interest rates, more money is supplied.
- Find the point where the demand curve intersects with the supply curve. This intersection is referred to as the equilibrium point.
- Draw a line from the equilibrium point directly down to the x-axis, which represents the quantity of money, to determine the equilibrium quantity. Then draw a line from the equilibrium point directly across to the y-axis to find the equilibrium interest rate.
When foreign investors alter their perceptions and invest less capital, the supply curve will shift to the left (a decrease in supply), resulting in a new equilibrium with a higher interest rate and a lower quantity of investment at the new intersection point.
For example, if we were to analyze Table 4.6 for the equilibrium rate and quantity before the shift, we would locate the interest rate and quantity where the savings and borrowing amounts match. After the supply decrease of $10 million at each interest rate due to a shift in foreign investor perceptions, we would then recalculate to find the new higher interest rate and decreased quantity that borrowers and savers agree upon.