Answer to Question #220744 in Macroeconomics for jannat

Question

Explain with help of diagram  how adjustment in interest rate help reach equilibrium in the financial market

Answer 1

Equilibrium in the financial market happens in situations where the interest rate at which the quantity of money demanded equals the quantity of money supplied. All other things held constant, a shift in money demand or supply will cause a change in the equilibrium interest rate and therefore cause changes in the level of real GDP and the price level.

For case where the interest rate falls. There will be a rightward shift in the aggregate demand curve from AD₁ to AD₂, as shown in Panel (c).

Lower interest rates in turn increase the quantity of investment.