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Chapter 4: Q7 (page 104)

Which of the following changes in the financial market will lead to a decline in interest rates:

a) rise in demand

b) fall in demand

c) rise in supply

d) fall in supply

Short Answer

Expert verified

Fall in demand and rise in supply leads to decline in interest rates in financial market.

Step by step solution

01

Financial Market Concept 

Financial market depicts quantity of funds and interest rate in market.

The equilibrium quantity of funds & equilibrium interest rates are determined as per demand & supply of these funds.

Interest being price of funds, so demand is inversely related to it & supply is directly related to it.

02

Financial Market Equilibrium Details 

Financial markets are at equilibrium where upward sloping supply curve & downward sloping demand curve intersect.

Increase in supply shifts the supply curve rightwards. It creates excess supply, competition among sellers & the equilibrium interest rate falls.

Decrease in demand shifts the demand curve leftwards. It also creates excess supply, competition among sellers & the equilibrium interest rate falls.

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Most popular questions from this chapter

Identify each of the following as involving either demand or supply. Draw a circular flow diagram and label the flows A through F. (Some choices can be on both sides of the goods market.)

a. Households in the labor market

b. Firms in the goods market

c. Firms in the financial market

d. Households in the goods market

e. Firms in the labor market

f. Households in the financial market

If a usury law limits interest rates to no more than 35%, what would the likely impact be on the amount of loans made and interest rates paid?

Name some factors that can cause a shift in the

demand curve in labor markets.

In the labor market, what causes a movement along the demand curve? What causes a shift in the demand curve?

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?
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