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Chapter 4: Problem 8

Which of the following changes in the financial market will lead to an increase in the quantity of loans made and received: a. a rise in demand b. a fall in demand c. a rise in supply d. a fall in supply

Short Answer

Expert verified
A rise in demand (a) and a rise in supply (c) in the financial market will lead to an increase in the quantity of loans made and received. This is because they both cause their respective curves to shift to the right, resulting in a higher equilibrium quantity of loans.

Step by step solution

01

Understanding demand and supply in financial market

In a financial market, the demand for loans comes from borrowers who need funds for various purposes like businesses, education, or personal needs. The supply of loans comes from lenders (such as banks) who are willing to provide those funds at a certain interest rate. The intersection (equilibrium) of the demand and supply curves determines the quantity of loans made and received in the market.
02

Analyzing the impact of rise in demand on loans

A rise in demand for loans occurs when more borrowers are seeking funds at various interest rates (for example, due to increased business opportunities or consumer confidence). A higher demand causes the demand curve to shift to the right, increasing the equilibrium quantity of loans and received at the new intersection. Answer choice (a) results in an increase in the quantity of loans made and received.
03

Analyzing the impact of fall in demand on loans

A fall in demand for loans occurs when borrowers are seeking fewer funds at various interest rates (for example, due to decreased business opportunities or consumer confidence). A lower demand causes the demand curve to shift to the left, decreasing the equilibrium quantity of loans made and received. Answer choice (b) does not result in an increase in the quantity of loans made and received.
04

Analyzing the impact of rise in supply on loans

A rise in supply of loans occurs when more lenders are willing to provide funds at various interest rates (for example, due to increased capital available or decreased reserve requirements). A higher supply causes the supply curve to shift to the right, increasing the equilibrium quantity of loans made and received at the new intersection. Answer choice (c) results in an increase in the quantity of loans made and received.
05

Analyzing the impact of fall in supply on loans

A fall in supply of loans occurs when fewer lenders are willing to provide funds at various interest rates (for example, due to decreased capital available or increased reserve requirements). A lower supply causes the supply curve to shift to the left, decreasing the equilibrium quantity of loans made and received. Answer choice (d) does not result in an increase in the quantity of loans made and received.
06

Conclusion

Based on the analysis, answer choices (a) a rise in demand and (c) a rise in supply will lead to an increase in the quantity of loans made and received in the financial market.

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Most popular questions from this chapter

What would be a sign of a shortage in financial markets?

Identify the most accurate statement. A price floor will have the largest effect if it is set: a. substantially above the equilibrium price b. slightly above the equilibrium price c. slightly below the equilibrium price d. substantially below the equilibrium price Sketch all four of these possibilities on a demand and supply diagram to illustrate your answer.

Whether the product market or the labor market, what happens to the equilibrium price and quantity for each of the four possibilities: increase in demand, decrease in demand, increase in supply, and decrease in supply.

How do economists define equilibrium in financial markets?

During a discussion several years ago on building a pipeline to Alaska to carry natural gas, the U.S. Senate passed a bill stipulating that there should be a guaranteed minimum price for the natural gas that would flow through the pipeline. The thinking behind the bill was that if private firms had a guaranteed price for their natural gas, they would be more willing to drill for gas and to pay to build the pipeline. a. Using the demand and supply framework, predict the effects of this price floor on the price, quantity demanded, and quantity supplied. b. With the enactment of this price floor for natural gas, what are some of the likely unintended consequences in the market? c. Suggest some policies other than the price floor that the government can pursue if it wishes to encourage drilling for natural gas and for a new pipeline in Alaska.
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