Suppose that the demand for loanable funds for car loans in the Milwaukee area is $10 million per month at an interest rate of 10 percent per year, $11 million at an interest rate of 9 percent per year, $12 million at an interest rate of 8 percent per year, and so on.
Instructions: Enter your answers as whole numbers.
a. If the supply of loanable funds is fixed at $14 million, what will be the equilibrium interest rate?
The given information indicates that each 1% decline in interest rate increases the demand for loanable funds by $1 million.
The supply of loanable funds is fixed at $14 million.
Following table shows the demand and supply of loanable funds at various interest rates based on above description -
| Interest rate | Demand for loanable funds | Supply of loanable funds |
| 10% | $10 million | $14 million |
| 9% | $11 milllion | $14 million |
| 8% | $12 million | $14 million |
| 7% | $13 million | $14 million |
| 6% | $14 million | $14 million |
| 5% | $15 million | $14 million |
Equilibrium interest rate is the interest rate corresponding to which demand for loanable funds equals the supply of loanable funds.
The demand for loanable funds and the supply of loanable funds are equal corresponding to the interest rate of 6%.
Thus,
The equilibrium interest rate will be 6%.
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