Question

3. Assume that the increase in income and wealth in China and India will cause the demand for international airline travel to increase over the next few years, and that this necessitates adding additional capacity to the international airline fleet. Aircraft are not inexpensive and require financing to purchase yet airlines are expecting profits to increase. Show and explain what happens in the market for loanable funds. (20 points) 4. An increase in the price level will result in an increase in the nominal amount of money that individuals desire to hold, but not an increase in the real amount of money. Explain this apparent contradiction. (20 points)

Answer 1

Answer 3:

Rate teretir I tment ange

Since the expansion of the airline industry requires large amount of financing, as the demand for airline travel increases, the demand for loanable funds in the market will also increase to finance for the greater demand for airline travel. This will shift the demand for loanable funds rightwards to D'D' and thus new equilibrium occurs at point E2 where rate of interest in the loanable fund market increases to Oi2 and equilibrium level of savings and investment also increases in the economy. This is depicted in the graph above.