Credit Market A. Plot the credit demand and supply curve in a figure. Specify the equi- librium real interest rate (r*) and the equilibrium quantity of credit (B*) in your figure. B. Everything else remaining unchanged, what is likely to happen to the credit market if the following scenario occurs? Separately and graphi- cally show the change of each scenario. Specify the new equilibrium in the credit market. B.1 Businesses in the economy see scope for growth and are planning to expand production in the future. B.2 Households expect a recession in near future. B.3 The government is planning to borrow money from financial in- stitutions for investment in infrastructures.

The table below shows the amount of savings and borrowing in a market for loans to purchase homes, measured in millions of dollars, at various interest rates. InterestRate QuantitySupplied QuantityDemanded5%                       98                            2216%                      129                           1917%                      160                           1608%                      178                           1429%                      196                           12410%                    214                           106 What is the equilibrium interest rate and quantity of loaned funds? r =  % Q = Suppose there is a decrease in demand of money, what will happen to interest rates and quantity? Increase in Interest Rates, Increase in Quantity?Increase in Interest Rates, Decrease in Quantity?Decrease in Interest Rates, Increase in Quantity?Decrease in Interest Rates, Decrease in Quantity?

Why was it so easy for non-credit worthy people to qualify for a mortgage loan, either a new loan or a refinancing of a previous loan, in the 1990s and early 2000s? O Banks were obligated to lend money to low-income people as mandated by the Community Reinvestment Act of 1977 and 1999. O In 2004 the Housing and Urban Development Agency (HUD) of the federal government mandated that Fannie Mae and Freddie Mac purchase X amount of sub-prime loans from banks. O The deregulation policies of the 1990s gave many financial firms a free hand in dealing with mortgage buyers. O All of the above.

Effects of a government budget deficit