Chapter 26, Problem 1P

To determine

To explain:

The effect on the bond market and the loan market in the move from a below-equilibrium interest rate to the equilibrium interest rate. The effect on the bond market and the loan market in the move from an above −equilibrium interest rate to the equilibrium interest rate should also be explained.

Explanation of Solution

The demand of the money in the economy builds when the interest rate lags the equilibrium interest rate. In such situation, people will not invest in the bond market and will try to get a hold of the money as because of the fear of unprofitability. On the contrary, the requirement of the loan in the time period when the interest rate levels down will increase gradually resulting in the increment of the price of the loan.

The supply of the money in the economy builds when the interest rate exceeds the equilibrium interest rate because in such a situation, people will invest in the bond market and will try to spend the money in hand because of the probability of profit.On the contrary, the requirement of the loan in the time period when the interest rate levels up will increase gradually resulting in the decrement of the price of the loan.

Economics Concept Introduction

Bond market and loan market:

A financial market where people are involved in the issuing of new debt is known as bond market.The issuing of debt occurs in the form of the bonds. The fastest growing market in the recent economies of the countries is the loan market where the organisations provide loans to the people who are interested in buying and even forwardly sell them to the investors.