Question

Suppose an increase in demand in the market for mutual funds (a financial capital market) causes the interest rate to increase from 2% to 4%. How will this increase in demand affect supply and quantity supplied

Answer 1

As demand for mutual funds increases causing interest rates to rise, the law of supply dictates that the quantity of financial capital supplied will increase since higher interest rates make supplying capital more profitable.

Step-by-step explanation:

Impact of Increased Demand on Interest Rates and Supply

When an increase in demand in the market for mutual funds causes the interest rate to increase from 2% to 4%, we can apply the laws of demand and supply to understand the effects on supply and quantity supplied. An increase in interest rates typically reflects a higher cost of borrowing, which corresponds to a higher price in the financial market. Hence, according to the law of supply, a higher interest rate or price should increase the quantity supplied. This means that more firms would be willing to supply financial capital, as it is now more profitable for them to do so.

In contrast, higher interest rates will decrease the quantity demanded of mutual funds since consumers and businesses will find borrowing more expensive. However, since the initial scenario presents an increase in demand, the market may be experiencing factors that increase demand despite higher interest rates, such as a strong economic outlook or a lack of alternative investments. Even with a higher interest rate, if demand continues to outpace the quantity supplied at the new price level, there may not be an excess supply; instead, the market may reach a new equilibrium at this higher interest rate.

Answer 2

With the increase in the demand of the mutual funds, the quantity supplied of the mutual funds will also increase because of the increase in the rate of interest.

Step-by-step explanation:

All in all, when the rate of interest is rising, it normally makes shared assets, and different ventures, less appealing. This is on the grounds that the expense of acquiring increments with an expansion in loan fee and people and organizations has less cash to place in their portfolio.

As a result of this increase in the cost of borrowing, the quantity supplied of the mutual funds increases in the market, thus increasing the supply in the financial market.