Economics
5th Edition
ISBN: 9781319066604
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
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Question
Chapter 25, Problem 7P
To determine
Why equilibrium in the loanable funds market maximizes efficiency.
Concept introduction:
Loanable Funds Market: It is an imaginary market which illustrates the market result of the
Demand for Loanable Funds: It is represented by a downward sloping curve which shows that as the interest rate increases the demand for loanable funds decreases and vice versa.
Supply for Loanable Fund: It is represented by the s curve that slopes upward which means that as the interest rate increases the supply of loanable fund also rises and vice versa.
Equilibrium Interest Rate: In the loanable fund market the point where demand curve and supply curve intersect. Each Other gives the equilibrium interest rate.
Factors that help in shifting demand for loanable funds are:
Change in Perceived Business Opportunities: When the businessman in a market is opportunistic and optimistic about the condition of market then the demand curve shifts rightward otherwise leftward.
Change in Government Borrowing :When there is a budget deficit it means government spends more than the tax revenue it has.
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