Question

For an imaginary economy, when the real interest rate is 5 percent, the quantity of loanable...

For an imaginary economy, when the real interest rate is 5 percent, the quantity of loanable funds demanded is $1,000 and the quantity of loanable funds supplied is $1,000. Currently, the nominal interest rate is 9 percent and the inflation rate is 2 percent. Currently,

a) the quantity of Ioanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will fall.

b. the market for loanable funds is in equilibrium. c. the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will rise. d. the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, and as a result the real interest rate will rise.

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Answer #1

Ans - a) the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a result the real interest rate will fall.

Explanation:

When interest rate is 5 percent, money demand = money supply but here currently real interest rate = 9-2 = 7% i.,e as interest rate is higher people will demand less money so demand is less and quantity of loanable fumds is more that's why interest rate will fall till it comes back to 5% and the market is again at equilibrium.

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