Question

at an 8% interest rate, the quantity of savings is $250 billion. what would the quantity of savings be if the interest rate fell to 5%?

Answer 1

The new quantity of savings would be approximately $156.25 billion.

Step-by-step explanation:

To find the new quantity of savings when the interest rate falls to 5%, we can use the concept of inverse variation. Inverse variation states that as one quantity increases, the other quantity decreases in proportion.

Let's set up a proportion using the given information:

8% / $250 billion = 5% / x

Cross-multiplying, we get 8% * x = 5% * $250 billion. Simplifying, we find:

x = (5% * $250 billion) / 8%

Calculating this, we find that the new quantity of savings would be approximately $156.25 billion.

Answer 2

The quantity of savings is likely to decrease if the interest rate falls from 8% to 5%, because a lower interest rate can make savings less attractive. Determining the exact quantity requires analysis of supply and demand in the capital financial market, including shifts in the supply curve due to factors like foreign investor perceptions.

Step-by-step explanation:

When an 8% interest rate results in a quantity of savings of $250 billion, and the interest rate falls to 5%, the quantity of savings would likely decrease, assuming other factors remain constant. This is because a lower interest rate generally makes savings less attractive to individuals, leading to lower amounts of money being saved. However, actual savings behavior can be influenced by a range of factors, including economic conditions, consumer confidence, and fiscal policies, so the exact new quantity of savings cannot be determined without additional information about the supply and demand conditions in the financial market. In practice, to find the new quantity of savings, we would refer to the supply and demand curves in the capital financial market. If the supply curve shifts, indicating a change in savings rate due to external influences like foreign investor perceptions, the new equilibrium interest rate and quantity can be calculated by finding the intersection between the new supply curve and the existing demand curve. An example is provided in the context where foreign investor perceptions shift, causing a $10 million decrease in supply at every interest rate. This would typically lead to a rise in the equilibrium interest rate because of the decrease in the supply of loanable funds at each interest rate level.