Figure 32.1 represents the market for loanable funds.Which of the following is true at the equilibrium interest rate?

Question

Quizplus · Accepted Answer

At the equilibrium interest rate, the quantity of loanable funds demanded by investors is equal to the quantity of loanable funds supplied by savers. This means that the rate of return on capital for investment projects is equal to the interest rate. Investors will only borrow funds at the interest rate if they expect the rate of return on their investment projects to be at least as high as the interest rate. Therefore, at the equilibrium interest rate, the rate of return on capital equals the interest rate.

Figure 321 Represents the Market for Loanable Funds