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Unformatted text preview: loanable funds. In the equilibrium shown, the interest rate is 5 percent, and the quantity of loanable funds demanded and the quantity of loanable funds supplied both equal $1,200 billion. The adjustment of the interest rate to the equilibrium level occurs for the usual reasons. If the interest rate were lower than the equilib-rium level, the quantity of loanable funds supplied would be less than the quan-tity of loanable funds demanded. The resulting shortage of loanable funds would encourage lenders to raise the interest rate they charge. Conversely, if the interest rate were higher than the equilibrium level, the quantity of loanable funds sup-plied would exceed the quantity of loanable funds demanded. As lenders com-peted for the scarce borrowers, interest rates would be driven down. In this way, “Whoops! There go those darned interest rates again!”...
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.
- Spring '10