Question

Using the loanable funds model (from chapter 10) of interest rate determination (draw a graph), show the effect on the equilibrium interest rate and quantity of loanable funds in the United States, there is an increase in net capital inflow into the United States.

Answer 1

An increase in net capital inflow will increase the supply if lonable funds in the market which will shift the supply curve for lonable funds to the right from S to S'. This causes the excess supply of lonable funds in the market causing interest rates to fall from r to r' and an increase in equilibrium quantity of lonable funds from L to L'.

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