The diagram below show the market for financial capital assuming that national income is constant at potential GDP,Y*. FIGURE 25-2
-Refer to Figure 25-2.Suppose national saving is reflected by NS₀ and investment demand is reflected by I₀^D.If the real interest rate is i₄,there is ________,which will drive the real interest rate up to i*.

Question

The diagram below show the market for financial capital assuming that national income is constant at potential GDP,Y*.

FIGURE 25-2
-Refer to Figure 25-2.Suppose national saving is reflected by NS₀ and investment demand is reflected by I₀^D.If the real interest rate is i₄,there is ________,which will drive the real interest rate up to i*.

Quizplus · Accepted Answer

At the given interest rate of iS1U1B14S1U1B0, the quantity of financial capital demanded (by investment demand curve IS1U1B10S1U1B0S1U1P1D) exceeds the quantity supplied (by national saving curve NSS1U1B10S1U1B0). This implies an excess demand for financial capital, which drives up the real interest rate towards its equilibrium level (i*).

The Diagram Below Show the Market for Financial Capital Assuming