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Chapter 4: Q. 4 (page 103)

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

curve?

Short Answer

Expert verified

Changes in the interest rate

Step by step solution

01

Step 1

A demand curve is a representation of how the product price relates to the amount of demanded product. The prices are usually written on the vertical axis which is always on the left while the demanded quantity on the horizontal axis. The demand curve shifts when other demand determinants change as the price remains constant.

02

Step 2

Changes in the interest rate (i.e., the price of financial capital) cause a movement along the demand curve. A change in anything else (non-price variable) that affects demand for financial capital (e.g., changes in confidence about the future, changes in needs for borrowing) would shift the demand curve.

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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.

  1. The number of people at the most common ages for home-buying increases.
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  4. Because of a threat of a war, people become uncertain about their economic future.
  5. The overall level of saving in the economy diminishes.
  6. The federal government changes its bank regulations in a way that makes it cheaper and easier for banks to make home loans.

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