Question

Utilize a market model to draw the demand and supply for loanable fund in equilibrium. Label...

Utilize a market model to draw the demand and supply for loanable fund in equilibrium. Label the demand curve D1 and the supply curve S1. Label the initial interest rate as r1 and quantity of loanable funds as Q1. Shift the correct curve to demonstrate what happens in this market when there is strong economic growth. Be sure to label the new equilibrium interest rate and quantity of loanable funds. Briefly describe what has happened in this market.

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Answer #1

An expanding economy with strong growth prospects will increase the demand for funds by investors as they would like to reap the benefits of higher expected profitability.

Demand for loanable funds shifts right. This raises interest rate as there is excess demand for funds at original equilibriuum interest rate. This pushes rate up and some increase in investment is reduced. However, new equilibrium has a higher rate of interest and a higher level of funds demanded and supplied.

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