Figure 26-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars.
-Refer to Figure 26-4. Regard the position of the Supply curve as fixed, as on the graph. If the real interest rate is 8 percent, the inflation rate is 3 percent, and the market for loanable funds is in equilibrium, then the position of the demand-for-loanable-funds curve must be

Question

Figure 26-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars.

-Refer to Figure 26-4. Regard the position of the Supply curve as fixed, as on the graph. If the real interest rate is 8 percent, the inflation rate is 3 percent, and the market for loanable funds is in equilibrium, then the position of the demand-for-loanable-funds curve must be

Quizplus · Accepted Answer

The equilibrium real interest rate of 8% is represented by the intersection of the supply and demand-for-loanable-funds curves at point U1 on the graph. With an inflation rate of 3%, the nominal interest rate is 11%. At this interest rate, the quantity of loanable funds demanded is represented by the point where the demand-for-loanable-funds curve intersects the vertical line representing 11% nominal interest rate, which is at point B12. Therefore, the position of the demand-for-loanable-funds curve must be D₂.