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Chapter 4: Q. 7 (page 104)

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

a. a rise in demand

b. a fall in demand

c. a rise in supply

d. a fall in supply

Short Answer

Expert verified

Interest rates will fall as a result of options (b) and (c). Lenders will be unable to charge as much if demand is weaker, and with more lenders accessible, competition for borrowers will push rates down.

Step by step solution

01

Definition

Financial Markets:

The markets in a country that oversee the trading of derivatives and bonds at various times are referred to as financial markets. These markets are critical because they connect investors and businesses, providing the financial backing that businesses require to operate effectively in the market. In general, financial markets serve as a conduit between lenders and borrowers in the economy.

02

Explanation

Interest rates are determined by the provision and demand for credit: an increase within the demand for money or credit raises interest rates, while a fall within the demand for credit lowers them. And as credit becomes more plentiful, the value of borrowing (interest) falls. Interest rates will decrease as demand declines and provide increases. Lenders are unable to charge the maximum amount if demand is weaker, and with more lenders accessible, competition for borrowers will push rates down.

03

Conclusion

Therefore, If demand is poor, lenders will be unable to charge as much, and with more lenders available, competition for borrowers would drive rates down.Option (b) and (c).

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Most popular questions from this chapter

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.

Interest Rate
Qs
Qd
5%
130170
6%135150
7%140140
8%145135
9%
150125
10%155110

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.

What is the 鈥減rice鈥� commonly called in the labor market?

Would usury laws help or hinder the resolution of a shortage in financial markets?

Why are the factors that shift the demand for a product different from the factors that shift the demand for labor? Why are the factors that shift the supply of a product different from those that shift the supply of labor?
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