Question

(a) Consider the US loanable funds market. For each of the following separate scenarios, draw a graph to show how the equilibrium interest rate and equilibrium quantity of loanable funds changes.

(i) Banks impose more regulations and make it more difficult for firms to borrow.

(ii) Productivity of machines decreases.

(iii) Households are less confident about the economy, they expect a recession will come soon.

Answer 1

Consider the US lonable fonds market. (i) Brenk imposes more regulations & make it onore difficult for floms to borrow. This lead to decrease in amount of lonable frend demand at a given interest rate which shifts the demand curve to the left Equilibriem shift from E to E supply The interest rate & Quantity of lonable fund decreases. Inderoof sale e EO & 0 ( Quanding of 9 Lonable fund () Productivity of machines decreases. This lead to increase in amount of lonable fund demand at given interest rate which shifts the demand curve to Interest rate Equilibrium shift from E to E supply The interest rate & Quaudity of lonable in fund both increases. the right. (Ę i Quantity of lonable fund.

the liquidity (18) Household are less confident about the conomy, they expect a recession will come soon. This lead to increase in the economy which Stroulate household to save less thus supply of lonable fund decreases at a given rate of interest Interestrate Equilibrium shift from Eo to E There is rise in interest rate & fall ion the quanlity of lonable fund. Si So i EL 1 Eo Demand OF O Quantity of tonable fand