Figure 18-4.On the horizontal axis of the graph,L represents the quantity of loanable funds in billions of dollars.
-Refer to Figure 18-4.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

Question

Figure 18-4.On the horizontal axis of the graph,L represents the quantity of loanable funds in billions of dollars. 
-Refer to Figure 18-4.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

Quizplus · Accepted Answer

According to the graph, the equilibrium real interest rate is determined at the intersection of the supply and demand curves, which at $56 billion is approximately 7 percent. However, if the rate of inflation is 4 percent, then the actual or nominal interest rate must be 4 percent higher than the equilibrium real interest rate, which would make it around 11 percent. So, the equilibrium real interest rate, adjusted for inflation, is between 6 and 8 percent, which is best represented by choice C.