Author Question: In the short run, how is the interest rate determined? If the interest rate is less than the ... (Read 79 times)

Mr.Thesaxman · **on:** Jun 29, 2018

In the short run, how is the interest rate determined? If the interest rate is less than the equilibrium interest rate, what occurs?

What will be an ideal response?

Question 2

Why do economists use graphs?

What will be an ideal response?

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

Answer to Question 1

The interest rate is determined in the money market by the interaction of the demand for money and the supply of money. If the interest rate is less than the equilibrium, there is an excess demand for money. In order to increase the quantity of money they hold, people sell bonds and other financial assets. As a result, the price of financial assets falls and the interest rate rises. People continue to sell assets and the interest rate continues to rise until it reaches its equilibrium.

Answer to Question 2

Graphs help economists, and others, to visualize the relationships between economic variables. Graphs that plot variables together help economists understand if the variables are related and how they are related. Graphs also help provide a visual picture of economic models that link different variables. Indeed, many other disciplines use such visual models. For example, architects work with blueprints (their model) and the blueprints represent every detail of a building. Economists' models do not reflect of every detail of the real world, but the graphs that they use nonetheless are valuable because they help clarify the linkages between the variables.