company 'A' plans to invest $10m on hotels, if the real interest rate is 8%, $12m if the real interest rate is 6%, $15m if the real interest rate is 4% and $18m if the real interest rate is 2%. Company ‘A’ expects to double its profits next year. If all other factors affecting demand remain stable, show by drawing the loan demand curve and explain how the increase in profits will affect the demand for debt funds.
Homework Answers
When company A expects to double its profit next year then demand for investment will increase and as a result demand for loan will increase. And the other factor that affects demand for loan remains constant that is interest rate. This will eventually result in a rightwards shift in loan demand curve.
The new demand curve for loan is the one drawn with dotted line and the direction of arrow shows the direction in which the demand curve for loan shifts due higher expectation of profit next year. Given the real interest doesn't change over time the new demand curve will the one with dotted line.
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