Demand and supply schedules in the capital market together determine the rate of interest

Demand and supply schedules in the capital market together determine the rate of interest

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Demand and supply schedules in the capital market together determine the rate of interest. In Figure 57 DD is the downward sloping demand curve for loanable funds. The supply curve of loanable funds SS is upward sloping showing an increased savings effort with every rise in the rate of interest. The two curves have intersected at point e which is an equilibrium position in the capital market. At point e the quantity of loanable funds exchanged is L and the rate of interest is r.
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Unformatted text preview: If the rate of interest is somewhat higher, for instance, like r 1, then supply of saving s1 will exceed demand for loanable funds d1 (s1 > d1). Therefore some savers will try to push down the rate of interest and move in the direction of the point e . On the other hand, if the actual rate of interest is lower (r2) then the demand for loanable funds, d2, exceeds supply of savings s2 (d2 > s2 )....
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This note was uploaded on 11/26/2011 for the course EC ec 201 taught by Professor - during the Fall '10 term at Montgomery.

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