The schedule shows various interest rates, the associated quantity demanded of loanable funds, and the quantity supplied of loanable funds in billions of dollars at those interest rates. What is the equilibrium interest rate?
Multiple Choice
8 percent
6 percent
4 percent
10 percent
The correct answer and explanation is:
To determine the equilibrium interest rate, it is important to understand that the equilibrium occurs where the quantity demanded for loanable funds equals the quantity supplied of loanable funds. The equilibrium interest rate is the rate at which these two quantities are equal, meaning the market for loanable funds is in balance.
In a typical loanable funds market, the demand curve slopes downward, indicating that as interest rates decrease, more loanable funds are demanded by borrowers. Conversely, the supply curve slopes upward, indicating that as interest rates increase, more funds are supplied by savers and investors who are willing to lend money.
The equilibrium interest rate is the point at which these two curves intersect, and this is the rate where the quantity of loanable funds demanded equals the quantity of loanable funds supplied. Without specific numbers or a graph to visualize this interaction, it can be challenging to pinpoint the exact equilibrium interest rate. However, the concept is straightforward: at the equilibrium rate, there is neither a surplus nor a shortage of loanable funds.
For example, if the quantity of loanable funds demanded at an interest rate of 8 percent equals the quantity supplied at the same rate, then 8 percent is the equilibrium interest rate. If the quantity demanded at 10 percent is higher than the quantity supplied, it indicates a surplus, and the interest rate will likely decrease to reach equilibrium.
In this case, assuming the demand and supply match at one of the interest rates provided in the options (8 percent, 6 percent, 4 percent, or 10 percent), the equilibrium interest rate will be the one where these quantities are equal.
The correct answer would depend on the specific numbers provided in the schedule, but in this scenario, we would be looking for the interest rate where the quantity demanded of loanable funds equals the quantity supplied.