**The Market for Loanable Funds**The graph illustrates the market for loanable funds, highlighting the effects of a contractionary Open Market Operation (OMO).- **Axes:** - The vertical axis represents the "Interest Rate." - The horizontal axis represents the "Quantity of Funds" in millions of dollars.- **Curves:** - The **Supply of Loanable Funds** (LF) is represented by an upward-sloping orange line. - The **Demand for Loanable Funds** is shown by a downward-sloping blue line.- **Equilibrium:** - The intersection of the supply and demand curves indicates the equilibrium interest rate and quantity of loanable funds.**Key Observations:**- The effect of a contractionary OMO causes the supply of loanable funds to decrease.- This results in an increase in the interest rate, as marked by the black dashed lines at the equilibrium point.**Sentence Completion:**- "As a result of a contractionary policy, the interest rate **increases**, whereas the amount of loanable funds **decreases**." This graph effectively demonstrates how contractionary monetary policies can affect interest rates and the quantity of available loanable funds in the economy. The following graph shows the market for federal reserves. The kinked orange curve, labeled as $ \text{Supply}_{FF} $, represents the supply of federal funds. It is vertical at the current amount of available reserves and flattens when the federal funds rate reaches the prevailing discount rate. The blue curve indicates the demand for federal funds, which is downward sloping.Key assumptions and parameters:- The prevailing federal funds rate is 2%- The discount rate is 4%- The current amount of bank reserves is $2 millionThe Federal Reserve implements a contractionary policy by selling $1 million worth of government securities in open market operations (OMO).### Graph Explanation**Title:** The Market for Federal Reserves**Axes:**- **Y-Axis:** Federal Funds Rate, ranging from 0 to 5%- **X-Axis:** Quantity of Excess Reserves (Millions of Dollars), ranging from 0 to 5 million**Curves:**- **Supply Curve ($ \text{Supply}_{FF} $)**: - Orange and kinked - Vertical section at $2 million - Horizontal section at a federal funds rate of 4%- **Demand Curve**: - Blue and downward sloping **Symbols:**- **Green Triangle**: Represents the New Supply curve position after the contractionary policy.- **Gray Star**: Indicates the New Federal Funds Rate following the policy change.### Effect of Contractionary Policy- **Federal Funds Rate:** Increases- **Amount of Available Excess Reserves:** DecreasesStudents should use the green points (triangle symbols) to plot the new supply curve and the gray point (star symbol) to determine the new federal funds rate after the contractionary policy.

Supply and demand are two important factors governing the buying and selling of goods. They allude…

On the following graph, show the effect of a contractionary OMO on the market for loanable funds. ? INTEREST RATE 5 3 2 1 1 The Market for Loanable Funds Supply of LF Demand for LF 3 QUANTITY OF FUNDS (Millions of Dollars 5 decreases As a result of a contractionary policy the interest rate increases Demand for LF Supply of LF whereas the amount of loanable funds

On the following graph, show the effect of a contractionary OMO on the market for loanable funds. ? INTEREST RATE 5 3 2 1 1 The Market for Loanable Funds Supply of LF Demand for LF 3 QUANTITY OF FUNDS (Millions of Dollars 5 decreases As a result of a contractionary policy the interest rate increases Demand for LF Supply of LF whereas the amount of loanable funds

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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If an economic expansion in the economy caused an increase in the demand for loanable funds, what would be the effect on the interest rate and the quantity of funds loaned in the credit market? Question 20 options: Interest rates would decrease and the quantity of funds loaned would increase Interest rates and the quantity of funds loaned would decrease Interest rates and the quantity of funds loaned would increase Interest rates would increase and the quantity of funds loaned would decrease
QUESTION 9 Use the following diagram to answer this question The accompanying graph shows the market for loanable funds in equilibrium. Interest rate (%) 12 10 8 6 4 0 XH 2 3 E 4 6 5 Quantity of loanable funds (trillions of dollars) S Which of the following might produce a new equilibrium interest rate of 2% and a new equilibrium quantity of loanable funds of $5 trillion? OA. Firms become pessimistic about the future and, as a result, they cut back on their plans to buy new equipment and build new factories. ⒸB. Congress decreases the tax rate on interest income. C. Capital inflows from foreign citizens are declining. D. The U.S. government offers a tax credit for firms that built new factories in the U.S.
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Indicate the Quantity demanded and Quantity supplied of loanable funds if the Interest rates increases by 2% (from the equilibrium rate). would changed in interest rate cause a movement along the curve or shift? Interest rate 24% 22 20 ' 18 16 14 12 10 a 6 4 2 Y S ° $200 $400 600 D 800 1,000 1,200 Quantity of leanable funds (billions of dollars) Indicate the Quantity demanded and Quantity supplied of loanable funds if the Interest rates increases by 2% (from the equilibrium rate). would changed in interest rate cause a movement along the curve or shift?
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