Table 4.6 shows the amount of savings and borrowing in a...

Table 4.6 shows the amount of savings and borrowing in a market for loans to purchase homes, measured in millions of dollars, at various interest rates. What is the equilibrium interest rate and quantity in the capital financial market? How can you tell? Now, imagine that because of a shift in the perceptions of foreign investors, the supply curve shifts so that there will be $\$ 10$ million less supplied at every interest rate. Calculate the new equilibrium interest rate and quantity, and explain why the direction of the interest rate shift makes intuitive sense.

Key Concepts

Financial Market Equilibrium

This concept refers to the point where the quantity of funds supplied matches the quantity demanded at a particular interest rate. It is determined by the intersection of the supply and demand curves in the market for loanable funds. At equilibrium, there is no excess supply or demand, ensuring that every lender finds a borrower and vice versa.

Supply and Demand Analysis in the Loanable Funds Market

This key concept involves understanding how the supply of and demand for loanable funds determine market outcomes such as the equilibrium interest rate and quantity. The supply side represents savings or funds available for lending, while the demand side represents borrowing for investments like home purchases. Analyzing shifts in these curves helps predict changes in the equilibrium.

Shifts in the Supply Curve and Comparative Statics

This concept involves examining how external factors, such as changes in investor sentiment, can shift the supply curve. A leftward shift, meaning a decrease in the amount of funds supplied at every interest rate, leads to a new, higher equilibrium interest rate and a lower quantity of funds. Comparative statics is the method used to compare the old and new equilibrium states to understand these changes.

Transcript

00:01 So the table shows the amount of savings and borrowing in the market for loans to purchase homes, measured in millions of dollars at various interest rates.

00:10 Now, we're to find the equilibrium interest rate and quantity in capital financial market, and how we can tell, and we're to imagine that because of a shift in the perceptions of foreign investors, the supply curve shifts so that there will be a $10 million less supplied at every interest rate, what's calculate the new equilibrium interest rates and quantity and explain why the direction of the interest rate shift makes intuitive sense so i'm going to start one after the other so in capital financial markets savers are represented by the supply curve and the boroughs are represented by the demand curve so in the capital financial market here savers are represented by the supply cost and then borrowers are represented by the demand curve so the intersection of the demand and supply curves determines so when this intersects it determines the equilibrium interest rate and quantity at which the demand for funds is equal to the supply of funds demand for funds is equal to the supply of funds so at the intersection of the supply and demand curves, that's what equilibrium interest and rate and quantity at which the demand for funds is equal to the supply of funds.

02:12 So now that we understand that, back to the table, the equilibrium interest rate is, the equilibrium interest rate is 7 % at which the quantity of borrowing, which is qd, is equal to the quantity of lending, which is qs.

02:35 So, and this is equal to 140 million.

02:41 So with 10 million less supplied at every interest rate, it is found that the equilibrium interest rate is going to be 8%.

02:51 With 10 million less supplied at every interest rate, the equilibrium interest rate is going to be 8 % because the quantity of borrowing, which is qd is the quantity of boring which is qd is 135 is equal to the quantity of lending which is qs so this is equals to 145 minus 10 so that's 135 that's quantity of borrowing so now considering the table we are giving after reducing the the 10 million on supply 10 million 10 million supply every rate at 7%.

04:03 The quantity demanded now would be 140...

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