Question

4. Supply and demand for loanable funds 

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. 

_______ is the source of the supply of loanable funds. As the interest rate falls, the quantity of loanable funds supplied _______ 

Suppose the interest rate is 3.5%. Based on the previous graph, the quantity of loanable funds supplied is _______ than the quantity of loans demanded, resulting in a _______ of loanable funds. This would encourage lenders to _______ the interest rates they charge, thereby _______ the quantity of loanable funds supplied and _______ the quantity of loanable funds demanded, moving the market toward the equilibrium interest rate of_______ 

Answer 1

Blanks are answered in order

Saving; decreases

Greater ; surplus ; decrease ; decreasing ; increasing ; 3%

Answer 2

for the second blank after saving its actually increases. 

Answer 3

its decrease NOT increase. Make sure it's the right question and word for word or else you will get it wrong. The first person answered it correctly. greater, surplus, lower, decreasing, increasing & 3%

Answer 4

The supply of loanable funds comes from people who want to save and lend out some of their income. Savers sometimes lend directly by purchasing bonds in financial markets, or they lend indirectly by depositing funds with financial intermediaries, such as banks, that use the deposits to make loans. The interest rate indicates the return that lenders receive on their saving. The supply of loanable funds curve slopes upward. As the interest rate rises, the return on saving increases, and the quantity of loanable funds supplied increases. As the interest rate falls, saving becomes less attractive and consumption becomes more attractive, so the quantity of loanable funds supplied decreases.

Based on the graph you are given, at the interest rate of 3.5%, the quantity of loanable funds supplied ($350 billion) is greater than the quantity of loanable funds demanded ($250 billion), resulting in a surplus of loanable funds. Because of the surplus, lenders will face competitive pressure to lower the interest rates they charge. As they do so, the cost of borrowing falls, and they will attract more borrowers, thereby increasing the quantity of loanable funds demanded. At the same time, the lower interest rate discourages saving, thereby reducing the quantity of loanable funds supplied. This process continues until the interest rate reaches the equilibrium level of 3%, where the quantity of loanable funds demanded is exactly equal to the quantity of loanable funds supplied.