Question

(Saving or Investment) is the source of the demand for loanable funds. As the interest rate falls, the quantity of loanable funds demanded (increases or decreases). Suppose the interest rate is 5.5%. Based on the previous graph, the quantity of loanable funds supplied is (greater or less) than the quantity of loans demanded, resulting in a (surplus or shortage) of loanable funds. This would encourage lenders to (raise or lower) the interest rates they charge, thereby (increasing or decreasing) the quantity of loanable funds supplied and (increasing or decreasing) the quantity of loanable funds demanded, moving the market toward the equilibrium interest rate of (what percent?).

Answer 1

Investment drives the demand for loanable funds; a decrease in interest rates results in increased demand. If the supplied quantity is greater than the demanded quantity due to high-interest rates, a surplus occurs, prompting lenders to lower rates towards equilibrium.

Step-by-step explanation:

Investment is the source of the demand for loanable funds. As the interest rate falls, the quantity of loanable funds demanded increases. Suppose the interest rate is 5.5%. Based on the information provided, if the interest rate is above the equilibrium, such as 21%, the quantity of loanable funds supplied at that rate is greater than the quantity of loanable funds demanded. This results in a surplus of loanable funds.

This surplus would encourage lenders to lower the interest rates they charge, thereby increasing the quantity of loanable funds demanded and decreasing the quantity of loanable funds supplied, moving the market toward the equilibrium interest rate. The exact equilibrium interest rate is not provided, but it would be lower than the current rate of 5.5% if we assume that there is still a surplus at this rate.

An increase in the amount of available loanable funds implies that there are more suppliers in the market, which would result in a downward pressure on the price of borrowing, leading to a lower equilibrium interest rate than the current one.

Answer 2

If the interest rate is above the equilibrium level, there is a surplus of loanable funds which encourages lenders to lower the interest rates. This leads to a decrease in the quantity of loanable funds supplied and an increase in the quantity of loanable funds demanded, moving the market towards the equilibrium interest rate.

Step-by-step explanation:

If the interest rate is above the equilibrium level, then there is an excess supply or surplus of loanable funds. In this case, the quantity of loanable funds supplied is greater than the quantity of loans demanded, resulting in a surplus of loanable funds.

This surplus would encourage lenders to lower the interest rates they charge in order to attract borrowers. As a result, the quantity of loanable funds supplied would decrease, while the quantity of loanable funds demanded would increase. This process would continue until the market reaches the equilibrium interest rate.

In this scenario, the market is moving towards the equilibrium interest rate, which is not provided in the given information.