Question

4. Supply and demand for loanable funds alog The following graph shows the market for loanable funds in a closed economy. The upward sloping range line represents the supply of loanable funds, and the downward sloping blue line represents the demand for loanable funds ters ans access Tips ccess Tips 10 FOR YOU Suppo Tools NTEREST RATL Pent ar Principles of wand edback 100 LOANABLE FUNDS

Answer 1

1) Savings

( savings is a source of loanable funds. In fact, its the most common source of loanable funds. Saver is the supplier of loanable funds. Savings can come from individuals or institutions.)

2) Increases

( There is an inverse relationship between interest rates and demand for loanable funds. Therefore, a fall in interest leads to an increase in quantity demanded of loanable funds. A rise in interest rate leads to a decline in the quantity demanded of loanable funds.)

3) less than

( When interest rate is 4.5 percent, quantity of loanable funds supplied is 450 billion where as the quantity of loanable funds demanded is 550 billion. So when interest rate is 4.5 Percent, quantity of loanable funds supplied is less than the quantity )

4) shortage

( when interest rate is 4.5 percent, quantity of loanable funds demanded is 550 billion. But only 450 billion is supplied. Since quantity supplied is less than quantity demanded, there is shortage of loanable funds and this shortage is equal to 100 billion {550-450=100}. )

5) Excess demand

( since demand exceeds supply (550>450), there is excess demand )

6) raise

( Interest rate must be raised so that quantity demanded matches quantity supplied .)

7) lncreasing

( There is a positive relationship between supply of loanable funds and interest rate. Am increase in interest rate leads to an increase in quantity supplied of loanable funds.)

8) Decreasing

( we already saw that there is an inverse relationship between interest rate and quantity demanded of loanable funds. A raise in interest rate would lead to a decline in quantity demanded of loanable funds)

9) 5 %

( Equilibrium interest rate is determined by the intersection of demand curve and supply curve of loanable funds. Its the interest rate at which quantity demanded of loanable funds equals quantity supplied of loanable funds . ln the graph given, quantity demanded matches quantity supplied when interest rate is 5%)