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The following table presents the components of demand and supply in the market for loanable funds. The interest rate is measured as percent per year….

The first row is interpreted as follows: When the interest rate is 2 percent, I is $20 billion, (G – T) is $3 billion, Sv is $2 billion, and NKIF is $8 billion. Similarly for the other two rows.

1. In the table, complete the row “Demand for Loanable Funds.” Explain your answer.

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2. In the table, complete the row “Supply of Loanable Funds.” Explain your answer.

3. (a) Why is I inversely related to i?

    (b) Why is Sv positively related to i?

    (c) Why is NKF positively related to i?

4. (a) Why is the equilibrium nominal interest rate 4 percent?

    (b) If the nominal interest rate were 2 percent, what would make it increase to 4 percent?

    (c) If the nominal interest rate were 6 percent, what would make it decrease to 4 percent?

    (d) Why is the real interest rate also 4 percent?

You MUST incorporate a graph in your answers to question 4 (a), (b), (c).

5. Anticipated inflation changes from zero to six percent.

    (a) What is the new nominal interest rate? Explain your answer.

    (b) What happens to the real interest rate? Explain your answer.

 

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