The ________ rate of interest is determined by interaction of the supply and demand functions. As a cost of borrowing and a reward for lending, the rate must reach the point where total supply of savings ________ total demand for borrowing and investment.

Question

Quizplus · Accepted Answer

The equilibrium rate of interest is the point where the supply and demand functions intersect, which means that the total supply of savings equals the total demand for borrowing and investment. The minimum rate of interest would imply that lenders are willing to provide loans at rock-bottom prices, which is not desirable from a financial stability point of view. A low-interest-rate environment could lead to excessive and unsustainable borrowing, resulting in increased default rates and financial instability. Hence, the equilibrium rate of interest is the optimal choice as it ensures that the market clears and that there are no excesses or shortages of saving or borrowing.

The ________ Rate of Interest Is Determined by Interaction of the Supply