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Chapter 4: Q17 (page 104)

How do economists define equilibrium in financial

markets?

Short Answer

Expert verified

Equilibrium in financial markets is determined when market demand for funds = market supply of funds, and the respective curves intersect.

Step by step solution

01

: 

Market Equilibrium is an economic state in which market demand & market supply are balanced & prices are stable.

In case of financial markets also, equilibrium is determined as per market demand & market supply of funds.

Market demand for funds is inversely related to their price ie interest rate. Market Supply of funds is directly related to their price ie interest rates.

02

: 

Market Supply curve is upward sloping and market demand curve is downward sloping.

Equilibrium is determined where market demand = market supply, and demand & supply curves intersect.

The point of intersection gives equilibrium interest rate on y axis, and equilibrium quantity of funds demanded & supplied on x axis.

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Most popular questions from this chapter

Suppose that a 5% increase in the minimum wage causes a 5% reduction in employment. How would this affect employers and how would it affect workers? In

your opinion, would this be a good policy?

A price ceiling will have the largest effect:

a. substantially below the equilibrium price

b. slightly below the equilibrium price

c. substantially above the equilibrium price

d. slightly above the equilibrium price

Table 4.6 shows the amount of savings and borrowing in a market for loans to purchase homes, measured in millions of dollars, at various interest rates. What is the equilibrium interest rate and quantity in the capital financial market? How can you tell? Now, imagine that because of a shift in the perceptions of foreign investors, the supply curve shifts so that there will be $10 million less supplied at every interest rate. Calculate the new equilibrium interest rate and quantity, and explain why the direction of the interest rate shift makes intuitive sense.

Other than the demand for labor, what would be

another example of a “derived demand?”

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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