Question

Question 2 (a) (i) Explain how each of the following events affect the supply of loanable funds curve: The economy is in a recession so people's disposable income is lower. (ii) The stock market is booming so the people's wealth is higher. (iii) Fewer college graduates are finding jobs so expected future income is lower. (iv) The real interest rate increases. (b) In the figure below, the initial supply of loanable funds curve is SLFO and the initial demand for loanable funds curve is DLFO. What will be the effects on the loandable funds market when there is an economic expansion that raises disposable income and the expected profit? SLFO SLF1 Real interest rate (percent per year) DLF DLFO 0.5 1.0 1.5 2.0 2.5 3.0 Loanable funds (trillions of 2005 dollars) 0

Answer 1

Real Interest Rate ro Loonable Funds Market 11 the economy is in recession & therefore the disposable income is lower they will demand less loons, which will reduce the real interest rate to ni from ro

real interest Rare DO Loonable Funds stock market is booming and people's weath is higher. They will demand more money as now they can afford to spend Real Interest Rate ro Loanable Funds Market fewer college graduates are finding jobs and therefore the expected feerere income is lower

Real Interest swephes, so Rate ri YO DO Loanable Market Funds Real interest rate rises from no tor, This will result in a surplus supply of Joonable unds in the market as less people I will demand loans at higher interest rates but more people will be ready to supply loans Ellect on Loanable fundo marlero ben there is an economic expansion that raises the disposable income and the expected profit. SLFO Real Interest of SLFI Rate DLFO 0 0.5 Loanable Funds Market

Economic expansion will raise disposable income and thus the demand for loans will increase. This is shown by the shift of demand curve from DLFO to DLFI Similarly expected profit will also increase the supply of loanable fund from BLFO to SOF Consequent shifts in both demand & supply of loanable funds will not leave real interest rates unchanged