The market for capital is in equilibrium at an interest rate of 3% and a quantity of $10 million. Suppose that households become more frugal and decide to spend less and save more. This would cause the equilibrium interest rate to ____ and the equilibrium quantity of capital to ____.

Question

Quizplus · Accepted Answer

When households decide to spend less and save more, the supply of savings—essentially the supply of capital—increases. This leads to a lower equilibrium interest rate due to the increased supply. Additionally, the quantity of capital in the market increases because there is more capital available for investment.

The Market for Capital Is in Equilibrium at an Interest