Figure 13-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars.
-Refer to Figure 13-4. If the equilibrium quantity of loanable funds is $56 billion and if the rate of inflation is 4 percent, then the equilibrium real interest rate is
A)lower than 6 percent..
B)6 percent.
C)between 6 percent and 8 percent.
D)higher than 8 percent.

Question

Figure 13-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars. 
-Refer to Figure 13-4. If the equilibrium quantity of loanable funds is $56 billion and if the rate of inflation is 4 percent, then the equilibrium real interest rate is
A)lower than 6 percent.. 
B)6 percent. 
C)between 6 percent and 8 percent. 
D)higher than 8 percent.

Quizplus · Accepted Answer

From the graph, we can see that the equilibrium real interest rate is where the supply and demand curves intersect, which is at point E. At this point, the quantity of loanable funds is $56 billion. However, because the rate of inflation is 4 percent, we need to adjust the nominal interest rate to get the real interest rate.

The real interest rate is equal to the nominal interest rate minus the rate of inflation. Assuming that the nominal interest rate is equal to the equilibrium interest rate, which is around 10 percent, the real interest rate would be 6 percent (10% - 4%). Therefore, the correct answer is C, which states that the equilibrium real interest rate is between 6 percent and 8 percent.