Question

At the interest rate of 5%, the people of the country of Rupertopia are willing to lend $10,000 to local business, while local businesses are willing to borrow $20,000. When the interest rate rises to 10%, the quantity of loans supplied increases to $20,000, while the quantity of loans demanded drops to $10,000. Because the people of Rupertopia are suspicious of outsiders, all financial transactions happen between locals. Assume both supply and demand curves for loanable funds are linear.

Peter hopes to borrow money to open a factory in town. Given the above information and holding everything else constant, what is the interest rate Peter will pay for the loan.

Select one:

a. 6.5%

b. 7%

c. 7.5%

d. 8%

Answer 1