Author Question: Using the above figure, which of the following is CORRECT? A) 1 guilder will sell for 2. B) 1 ... (Read 71 times)

kodithompson · **on:** Jun 29, 2018

Using the above figure, which of the following is CORRECT?

A) 1 guilder will sell for 2.
B) 1 dollar will sell for 1/2 guilder.
C) A shortage of guilders exists at an exchange rate above 0.60.
D) A surplus of guilders exists at an exchange rate above 0.60.

Question 2

In the loanable funds market, what variable changes to eliminate a shortage of loanable funds and how is the shortage eliminated?

What will be an ideal response?

chloejackso · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

D

Answer to Question 2

The real interest rate changes to eliminate the shortage of loanable funds. A shortage of loanable funds means that businesses and others want to borrow more than households and others are willing to loan so that the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied. This shortage means that some businesses are willing to pay a higher interest rate. The real interest rate rises, and as it does so, the quantity of loanable funds demanded decreases and the quantity of loanable funds supplied increases. Both changes help eliminate the shortage of loanable funds and so the real interest rate rises until it reaches its equilibrium value.