The following graph shows the market for loanable funds in a closed economy. The

Question

The following graph shows the market for loanable funds in a closed economy. The upward-sloping orange line represents the supply of loanable funds, and the downward-sloping blue line represents the demand for loanable funds.

1) _________ (INVESTMENT or SAVING) is the source of the demand for loanable funds. As the interest rate falls, the quantity of loanable funds demanded 2) __________ (INCREASES or DECREASES) .

Suppose the interest rate is 3.5%. Based on the previous graph, the quantity of loanable funds supplied is 3) _______ (GREATER or LESS) than the quantity of loans demanded, resulting in a 4) _________ (SURPLUS or SHORTAGE) of loanable funds. This would encourage lenders to 5) ________ (RAISE or LOWER) the interest rates they charge, thereby 6) _______ (INCREASING or DECREASING) the quantity of loanable funds supplied and 7)_______ (INCREASING or DECREASING) the quantity of loanable funds demanded, moving the market toward the equilibrium interest rate of 8) _________%

Explanation / Answer

Ans.

1) INVESTMENT is the source of the demand for loanable funds. As the interest rate falls, the quantity of loanable funds demanded 2) INCREASES.

Suppose the interest rate is 3.5%. Based on the previous graph, the quantity of loanable funds supplied is 3) GREATER than the quantity of loans demanded, resulting in a 4) SURPLUS of loanable funds. This would encourage lenders to LOWER the interest rates they charge, thereby 6) Decreasing the quantity of loanable funds supplied and 7) INCREASING the quantity of loanable funds demanded, moving the market toward the equilibrium interest rate of 8) 3%

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