Imagine that in the market for loanable funds the equilibrium interest rate is e
ID: 1178114 • Letter: I
Question
Imagine that in the market for loanable funds the equilibrium interest rate is equal to 10% and the quantity of loanable funds is $500 billion. Answer the following questions:
(a) At which interest rate will there be an excess demand for money? What does this mean?
(b) At which rate will there be an excess supply of money? What does this mean?
(c) Describe in detail the adjustment process in the money market when there is an excess demand for money.
Explanation / Answer
when the interest rate is less than 10% there will be a excess demand of money as the loans are available in cheaper interest rate than the equlibrium interest rate which means economy has more money to lend.
when the interest rate is more than 10% there will be a excess demand of money as the loans are costlier than the interest rate than the equlibrium interest rate which means economy has more money to supply as a lack of demand for loans due to higher interest rates
when there is excess demand for money in money market the lenders will tend to give more and more loans and compete hence the supply of lendable money increases which inturn decrease the demand for money and hence the interest rate payable also decreases and finally adjusts where supply = demand
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