Answer to Question #316178 in Macroeconomics for let

Question

1.) Predict how each of the following economic changes will affect (separately) the equilibrium price and quantity in the financial market for home loans. Sketch a demand and supply diagram to support your answers.

1. The number of people at the most common ages for home-buying increases.
2. People gain confidence that the economy is growing and that their jobs are secure.
3. Banks that have made home loans find that a larger number of people than they expected are not repaying those loans.
4. Because of a threat of a war, people become uncertain about their economic future.
5. The overall level of saving in the economy diminishes.
6. The federal government changes its bank regulations in a way that makes it cheaper and easier for banks to make home loans.

Answer 1

1. Changes in the interest rate (i.e., the price of financial capital) cause a movement along the demand curve. A change in anything else (non-price variable) that affects demand for financial capital (e.g., changes in confidence about the future, changes in needs for borrowing) would shift the demand curve.
2. Changes in the interest rate (i.e., the price of financial capital) cause a movement along the supply curve. A change in anything else that affects the supply of financial capital (a non-price variable) such as income or future needs would shift the supply curve.
3. If market interest rates stay in their normal range, an interest rate limit of 35% would not be binding. If the equilibrium interest rate rose above 35%, the interest rate would be capped at that rate, and the quantity of loans would be lower than the equilibrium quantity, causing a shortage of loans.
4. b and c will lead to a fall in interest rates. At a lower demand, lenders will not be able to charge as much, and with more available lenders, competition for borrowers will drive rates down.
5. a and c will increase the quantity of loans. More people who want to borrow will result in more loans being given, as will more people who want to lend.