In the market for loanable funds, suppose the current interest rate is 5%. At a rate of 5%, investors wish to borrow $100 million and savers wish to save $125 million. We would expect:

Question

Mattie Mendez

Business

11 December, 08:39

In the market for loanable funds, suppose the current interest rate is 5%. At a rate of 5%, investors wish to borrow $100 million and savers wish to save $125 million. We would expect:

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Nora · Answer 1

We would expect interest rate to fall below 5%

Explanation:

Given demand for loanable funds (by borrowers) at $100 million, and supply (by savers) at $125 million, there is excess supply in the market for loanable funds, a trend that will push down pricing (current interest rate of 5%) to a level where demand is equal to supply (this level will be the equilibrium). This is in accordance with the law of demand and supply.