The demand for capital is Q^D = 100 - 20r and the supply of capital is Q^S = 12r - 28, where r is the interest rate and Q is the quantity of capital in millions of dollars. Assume that households increase savings such that households save $20 million more at every interest rate level. The new equilibrium interest rate is r = ____.

Question

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The new supply equation becomes Q^S = 12r - 28 + 20. Setting the new supply equal to demand: 100 - 20r = 12r - 8. Solving for r gives r = 3.38.

The Demand for Capital Is QD = 100 - 20r

The Demand for Capital Is Q^D = 100 - 20r