The economy of Dream Island, which is isolated from the rest of the world, has the supply of loanable funds sch and the demand for loanable funds schedule shown in the table above. As it happens, all of the supply of loanab are from households' saving and the entre demand for loanable funds is from firms' investment demand.
a) Draw the demand and supply curves.
b) What is the equilibrium real interest rate?
c) What is equilibrium investment? Equilibrium saving?
d) Describe the situation in Dream Island's loanable funds market when the real interest rate is 10 percent. Is th shortage of loanable funds? A surplus of loanable funds?
e) Describe the situation in Dream Island's capital market when the real interest rate is 6 percent. Is there a shor loanable funds? A surplus of loanable funds?
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