The Loanable Funds Theory suggests that the market interest rate is determined by the factors that control supply of and demand for loanable funds. Discuss the factors that affect interest rates.
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The Loanable Funds Theory suggests that the market interest rate is determined by the factors that control
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- Explain the loanable funds theoryDraw and fully label a diagram to illustrate the market for loanable fund to analyze this policy. How does the elasticity of the supply of loanable funds affect the size of these changes? How does the elasticity of the demand of loanable funds affect the size of these changes?Textbook: Macroeconomics by P. Krugman & R. Wells (5th Edition) Using the accompanying diagram, explain what will happen to the market for loanable funds when there is a fall of percentage points in the expected future inflation rate. How will the change in the expected future inflation rate affect the equilibrium quantity of loanable funds?
- Provide two examples of changes in the market for loanable funds that can result in a change in the level of interest rates. Explain how and why the interest rate changes based on the loanable fund theory.In detail what are some of the factors that affect demand for loanable funds according to the loanable funds theory of interest rate determination and what impact would these have on the demand and supply of funds and on the interest rateWhat are the factors affecting the amount of money paid for the use of borrowed capital or the income produced by the loaned money
- Supply and demand for loanable funds The following graph shows the market for loanable funds in a closed economy. The upward-sloping orange line represents the supply of loanable funds, and the downward-sloping blue line represents the demand for loanable funds. 01002003004005006007008009001000109876543210INTEREST RATE (Percent)LOANABLE FUNDS (Billions of dollars)Demand Supply is the source of the demand for loanable funds. As the interest rate rises, the quantity of loanable funds demanded . Suppose the interest rate is 4.5%. Based on the previous graph, the quantity of loanable funds supplied is than the quantity of loans demanded, resulting in a of loanable funds. This would encourage lenders to the interest rates they charge, thereby the quantity of loanable funds supplied and the quantity of loanable funds demanded, moving the market toward the equilibrium interest rate of .The table below shows Demand and Supply for loanable fund at given time. Real interest rate Quantity of loanable fund demanded (billion $) Quantity of loanable fund supplied (billion $) 0.01 1000 400 0.02 950 450 0.03 900 500 0.04 850 550 0.05 800 600 0.06 750 650 0.07 700 700 0.08 650 750 0.09 600 800 0.10 550 850 0.11 500 900 0.12 450 950 0.13 400 1000 0.14 350 1050 0.15 300 1100 Instructions: Using excel, find the equilibrium real interest rate and quantity of loanable fund. show the equilibrium on a graph. If this country experiences a recession business cycle phase that decreases the demand for loanable fund by $200 billion. Find the new equilibrium real interest rate and quantity of loanable fund. Show the shift on the graph. list Two factors that shift SLF rightward and two factors that shift DLF rightward What is the meaning of crowding out?…If and when the demand of loanable funds shifts to the left:
- QUESTION ONE Using the loanable funds theory, illustrate the effect of the following changes on the level of interest rates: Decrease in demand for loanable funds. Decrease in the supply of loanable funds.The economy of Dream Island, which is isolated from the rest of the world, has the supply of loanable funds schedule and the demand for loanable funds schedule shown in the table below. As it happens, all of the supplies of loanable funds are from households' savings and the entre demand for loanable funds is from firms' investment demand. Real interest rate (percent per year) Supply of loanable funds (2005 dollars) Demand for loanable funds (2005 dollars) 5 2,000 5,000 7 3,000 4,000 9 4,000 3,000 11 5,000 2,000 a) Draw the demand and supply curves.
