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 supplied equals the quantity demanded. This implies that there is no shortage or surplus of funds. Therefore, the interest rate is the price at which borrowers and lenders are willing to exchange funds.

At this equilibrium interest rate, the rate of return on capital equals the interest rate because it represents the cost of borrowing funds to finance investments. Investors will only invest if the expected rate of return on capital is greater than or equal to the interest rate. Thus, if the rate of return on capital is lower than the interest rate, borrowing to invest will result in losses, and investors will not be willing to finance these projects at that interest rate.

Figure 321 Represents the Market for Loanable Funds