Draw a graph depicting interest rates at the quantity of loanable funds. Answer the following questions regarding this graph.
Explain why the supply of loanable funds is upward sloping.
Explain why the demand of loanable funds is downward sloping.
If the Federal Reserve sells government bonds, show what will happen to this graph. Explain the effects on interest rates and the quantity of loanable funds.
If the Federal Reserve lowers the required reserve rate, show what will happen to this graph. Explain the effects on interest rates and the quantity of loanable funds.
The correct answer and explanation is :
Here’s a graph depicting the market for loanable funds, followed by a complete explanation:
📊 Graph: Market for Loanable Funds
Interest Rate
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| S (Supply of Loanable Funds)
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| /
| /
| /
| /
| /
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|/___________________________
Q (Quantity of Loanable Funds)
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\
\
\
\
\ D (Demand for Loanable Funds)🔍 Explanation (300 words):
The loanable funds market is a model that shows how the real interest rate is determined by the supply and demand for funds in the economy. The vertical axis represents the real interest rate, and the horizontal axis shows the quantity of loanable funds.
Why is the Supply Curve Upward Sloping?
The supply of loanable funds comes primarily from savers—households and institutions that lend money in exchange for interest. As interest rates increase, saving becomes more attractive because lenders receive a higher return. Therefore, more funds are made available for loans at higher interest rates, leading to an upward-sloping supply curve.
Why is the Demand Curve Downward Sloping?
The demand for loanable funds originates from borrowers, such as businesses and consumers who take loans to invest or spend. Higher interest rates make borrowing more expensive, discouraging borrowing and reducing the quantity of funds demanded. Thus, the demand curve slopes downward.
Federal Reserve Sells Government Bonds:
When the Fed sells bonds, it reduces the money supply by taking money out of circulation. This decreases the amount of funds available for lending, shifting the supply curve to the left. As a result, the interest rate increases and the quantity of loanable funds decreases.
Federal Reserve Lowers Reserve Requirement:
A lower reserve requirement means banks can lend out more of their deposits. This increases the supply of loanable funds, shifting the supply curve to the right. The result is a lower interest rate and a higher quantity of loanable funds.
