Step 1 If there is a rise in the real interest rate, how does the quantity of lo
ID: 1217623 • Letter: S
Question
Step 1
If there is a rise in the real interest rate, how does the quantity of loanable funds demanded change? Explain.
If there is a fall in the real interest rate, how does the quantity of loanable funds supplied change? Explain.
Step2
Use the following data table to determine the equilibrium real interest rate after certain factors change:
Month
Real Interest Rate (%)
Loanable Funds (trillions of $)
Exogenous Change
Equilibria (increases, decreases, or no change)
January
3%
3
no change
no change
April
3%
4
increased fund supply
?
July
4%
2
decreased fund supply
?
December
3%
3
increased fund demand
?
Month
Real Interest Rate (%)
Loanable Funds (trillions of $)
Exogenous Change
Equilibria (increases, decreases, or no change)
January
3%
3
no change
no change
April
3%
4
increased fund supply
?
July
4%
2
decreased fund supply
?
December
3%
3
increased fund demand
?
Explanation / Answer
Step 1:
a. Since real rate of interest is the cost of borrowing funds for the borrowers, any increase in the cost of borrowing fund will reduce the demand for loanable funds.
b. Real rate of interest rate is the rate of return that savers get after the funds are supplied in the market. Thus, decrease in the rate of return will reduce the supply of loanable fund.
Step 2:
With increase in fund supply, the equilibrium real rate of interest will fall as the supply of loanable fund curve will shift rightwards.
With decreased fund supply, the equilibrium real rate of interest will rise as the supply of loanable fund curve will shift leftwards.
With increased fund demand, the equilibrium real rate of interest will rise. as demand of loanable fund curve will shift rightwards.
The concept applied is same as the demand and supply curve analysis.
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