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Show how a decrease in the supply of loanable funds and an increase in the demand...

Show how a decrease in the supply of loanable funds and an increase in the demand for loanable funds can raise the real interest rate and leave the equilibrium quantity of loanable funds unchanged. Draw a demand for loanable funds curve. Label it DLF0. Draw a supply of loanable funds curve. Label it SLF0. Draw a point at the equilibrium real interest rate and quantity of loanable funds. Label it 1. Now draw a curve that shows an increase in the demand for loanable funds. Label in DLF1. Draw a curve that shows a decrease in the supply of loanable funds. Label it SLF1. Draw this curve in such a way that the equilibrium quantity of loanable funds does not change. Draw a point at the new equilibrium real interest rate and quantity of loanable funds. Label it 2. This needs to me a graph please

  

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Answer #1

In following graph, initial equilibrium is at point 1 where DLF0 and SLF0 intersect. Increase in demand shifts DLF0 rightward to DLF1, and a decrease in supply shifts SLF0 leftward to SLF1. The shifts are equal in magnitude, so the net effect is a definite increase in interest rate but quantity is unchanged.

Interest rate SLF1 SLFO 2 1 DLF1 DLFO Quantity

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