ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The equilibrium in the loanable funds market is extremely important for any economy. It determines the interest rate and the amount of money that flows into the economy. When the equilibrium interest is high, less money will flow into the economy.

Detailed explanation-2: -The market for loanable funds describes how that borrowing happens. The supply of loanable funds is based on savings. The demand for loanable funds is based on borrowing. The interaction between the supply of savings and the demand for loans determines the real interest rate and how much is loaned out.

Detailed explanation-3: -We have defined the equilibrium real interest rate (r∗) as the level of the real (short-term) interest rate that is consistent, in the long-run, with output at potential, unemployment at its natural rate, and inflation at the monetary policymaker’s long-run objective (Laubach and Williams [2003]).

Detailed explanation-4: -This will cause the supply of loanable funds to increase (shift to the right.) The equilibrium interest rate will fall. As the interest rate falls, people and businesses will have a greater incentive to borrow, moving along the demand curve to increase the equilibrium quantity of borrowing and lending in the market.

Detailed explanation-5: -To find the equilibrium interest rate set money demand equal to money supply and solve for r. Thus, 1400 + (10/r) = 1500 or r = . 10 or the interest rate is equal to 10%.