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Use the loanable funds model to analyze the impact of a wave of optimism spreading over...

Use the loanable funds model to analyze the impact of a wave of optimism spreading over the business community.

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A wave of optimism spreading over the business community will increase the demand for the loanable fund in the economy and they will look for more investment at the prevailing interest rates. This will shift the demand curve to the right at a higher interest rate and higher quantity of funds supplied.

The graph shown above is at equilibrium at point "a" where the interest rate is "i" and quantity of loanable funds demanded is Q. After the optimism in the market, the demand for the loanable funds shifted to D2 and the new equilibrium is at point "b" at a higher interest rate and higher quantity of investment in the market.

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