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Chapter 4: Problem 30

Predict how each of the following economic changes will affect the equilibrium price and quantity in the financial market for home loans. Sketch a demand and supply diagram to support your answers. a. The number of people at the most common ages for home-buying increases. b. People gain confidence that the economy is growing and that their jobs are secure. c. Banks that have made home loans find that a larger number of people than they expected are not repaying those loans. d. Because of a threat of a war, people become uncertain about their economic future. e. The overall level of saving in the economy diminishes. f. The federal government changes its bank regulations in a way that makes it cheaper and easier for banks to make home loans.

Short Answer

Expert verified
a. An increase in demand for home loans results in a higher equilibrium price and quantity. b. Greater confidence in the economy leads to an increase in demand, raising the equilibrium price and quantity for home loans. c. When banks become more cautious, the supply of home loans decreases, resulting in a higher equilibrium price and lower quantity. d. Uncertainty due to war threats causes a decrease in demand, lowering the equilibrium price and quantity for home loans. e. A decrease in overall savings reduces demand, leading to a lower equilibrium price and quantity in the home loan market. f. Changes in bank regulations leading to an increase in supply of home loans results in a lower equilibrium price and higher quantity.

Step by step solution

01

a. The number of people at the most common ages for home-buying increases.

This scenario will lead to an increase in demand for home loans, as more people are looking for loans to buy homes. This shift in demand to the right will result in a new equilibrium, with a higher price and higher quantity in the financial market for home loans. Sketch a demand and supply diagram with an increase in demand to support this conclusion.
02

b. People gain confidence that the economy is growing and that their jobs are secure.

With greater confidence in the economy and job security, people are more likely to take loans to purchase homes. This will cause an increase in demand for home loans, shifting the demand curve to the right. The new equilibrium will have a higher price and quantity in the financial market for home loans. Sketch a demand and supply diagram with an increase in demand to support this conclusion.
03

c. Banks that have made home loans find that a larger number of people than they expected are not repaying those loans.

In this scenario, banks will be more cautious in providing home loans, leading to a decrease in the supply of home loans. This will shift the supply curve to the left, resulting in a new equilibrium with a higher price and a lower quantity in the financial market for home loans. Sketch a demand and supply diagram with a decrease in supply to support this conclusion.
04

d. Because of a threat of a war, people become uncertain about their economic future.

The uncertainty caused by the threat of war will make people less likely to take loans for buying homes due to the fear of financial instability. This will result in a decrease in demand for home loans, shifting the demand curve to the left. The new equilibrium will have a lower price and quantity in the financial market for home loans. Sketch a demand and supply diagram with a decrease in demand to support this conclusion.
05

e. The overall level of saving in the economy diminishes.

A decrease in the overall level of saving may indicate that people are not saving enough to afford significant investments, such as buying a home. This would lead to a decrease in demand for home loans, shifting the demand curve to the left. The new equilibrium will have a lower price and quantity in the financial market for home loans. Sketch a demand and supply diagram with a decrease in demand to support this conclusion.
06

f. The federal government changes its bank regulations in a way that makes it cheaper and easier for banks to make home loans.

If the government makes it cheaper and easier for banks to provide home loans, the supply of home loans will increase. This will shift the supply curve to the right, leading to a new equilibrium with a lower price and higher quantity in the financial market for home loans. Sketch a demand and supply diagram with an increase in supply to support this conclusion.

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Most popular questions from this chapter

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.

Under what circumstances would a minimum wage be a nonbinding price floor? Under what circumstances would a living wage be a binding price floor?

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

Imagine that to preserve the traditional way of life in small fishing villages, a government decides to impose a price floor that will guarantee all fishermen a certain price for their catch. a. Using the demand and supply framework, predict the effects on the price, quantity demanded, and quantity supplied. b. With the enactment of this price floor for fish, what are some of the likely unintended consequences in the market? c. Suggest some policies other than the price floor to make it possible for small fishing villages to continue.

If the government imposed a federal interest rate ceiling of \(20 \%\) on all loans, who would gain and who would lose?
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