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Hey everyone, today we're answering problem number seven from chapter four of the textbook.
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So essentially we have our financial market graph right here, and we're asked what would cause a decline in interest rates? is it a rise or fall in demand or a rise or fall in supply? all right, so here is our financial market graph where we have demand and supply labeled, and the interest rate is on the y -axis, and then the quantity.
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Is on the x -axis.
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All right.
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So what we know is that the laws of supply and demand that are fundamental to our understanding of economics of just general markets will also apply to financial markets.
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So according to the law of demand, a higher rate of return that is a higher price or higher interest rate will decrease the quantity demand, or quantity demand rather.
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So let me repeat that.
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A higher interest rate will decrease the quantity demanded.
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As the interest rates rise, consumers will reduce the quantity that they borrow...