Q.30 Predict how each of the followin... [FREE SOLUTION]

Chapter 4: Q.30 (page 106)

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.
The number of people at the most common ages for home-buying increases.
People gain confidence that the economy is growing and that their jobs are secure.
Banks that have made home loans find that a larger number of people than they expected are not repaying those loans.
Because of a threat of a war, people become uncertain about their economic future.
The overall level of saving in the economy diminishes.
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

The demand for home loans will also increase.
b. The demand for loans will also increase.
c. The supply of loans will decrease.
d. The demand for loans will decrease.
e. The supply of loans decreases.
f. The supply of loans will increase.

Step by step solution

Explanation of (a.)

When the number of people at the most common ages for home-buying increases then the demand for home loans will also increase. Shown below in the supply and demand graph that as the people plans on buying homes then the demand for loan rises due to which the demand curve shifts rightward thus the quantity rises from Q to Q₁ and the interest rate rises from i to i₁

Explanation of (b.)

When people gain confidence that the economy is growing and that their jobs are secure then the demand for loans will also increase. Shown below in the supply and demand graph that as the people get confidence in their job security then the demand for loans rises due to which the demand curve shifts rightward thus the quantity rises from Q to Q₁ and the interest rate rises from i to i₁

Explanation of (c.)

When expect the loans woud not be repaid then the supply of loans will decrease. Shown below in the supply and demand graph that as people will not repay the loan amount that will decrease the availability of cash due to which the lenders will not be able to give loan thus the supply of loans will decrease from Q to Q₁ due to which interest rate will increase from i to i₁

Explanation of (d.)

Uncertainty regarding future and reduction in consumer confidence would cause demand for loans to decrease. Shown below in the supply and demand graph that due to uncertainty in the economy the requirement or demand of loans will decrease which will make a leftward shift in the demand curve. Thus, the quantity demand of loans will decrease from Q to Q_{1 ,}and the interest rate will also decrease from i to i₁

Explanation of (e.)

When the savings level in the economy declines then the supply of loans decreases. Shown below in the supply and demand graph that as the savings will decrease that will decrease the availability of cash due to which the lenders will not be able to give loan thus the supply of loans will decrease from Q to Q₁ due to which interest rate will increase from i to i₁

Explanation of (f.)

When loans become cheaper and it becomes easier for banks to make home loans then the supply of loans will increase. Shown below in the supply and demand graph that as the law is passed due to which the lenders can give loans more easily and at cheaper rate then the supply curve will shift rightward which will make an increase in the supply of loans from Q to Q₁and decrease in interest rate from i to i₁