The table shows the amount of savings and borrowing in a market for loans to pur
ID: 1134330 • Letter: T
Question
The table shows the amount of savings and borrowing in a market for loans to purchase homes, measured in millions of dollars, at various interest rates
Interest rate QS QD
5% 130 170
6% 135 150
7% 140 140
8% 145 135
9% 150 125
10% 155 110
(a) what is the equilibrim interest rate and quantity in the capital financial market? How can you tell?
(b) now imagine that because of a shift in the perceptions of foreign invetors, the supply curve shifts so that there will be $10 million less supplied at every interest rate
(c) calculate the new equilibrium interest rate and quantity and explain why the direction of the interest rate shift makes intuitive sense
Explanation / Answer
Equilibrium interest rate will be there where quantity demanded is equal to the quantity supplied.
As we can see from the above table the Quantity demanded is equal to Quantity Supplied at an interest rate of 7%.
At interest rate 7% quantity demanded = 140 and quantity supplied = 140.
Hence equilibrium interest rate is 7%.
B. Due to changed perception of foreign investors the supply curve has shifted so that the supply at all interest rate level reduced by $10 million. Below is the revised Table.
C. From above table we can see at an interest rate of 8% the quantity demanded is equal to the quantity supplied. Thus, new equilibrium interest rate is 8%.
The interest rate increased from 7% to 8% because the supply curve has shifted to it's left that is supply reduced. Thus due to less supply and further the demand is assumed to be constant (cetris paribus) the interest rate increased.
Interest Rate Q S Q D 5% 120 170 6% 125 150 7% 130 140 8% 135 135 9% 140 125 10% 145 110Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.