Demand and Supply in Financial Markets


Predict how each of the following economic changes will affect 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.

Table shows the amount of savings and borrowing in a market for loans to purchase homes, measured in millions of dollars, at various interest rates. What is the equilibrium interest rate and quantity in the capital financial market? How can you tell? Now, imagine that because of a shift in the perceptions of foreign investors, the supply curve shifts so that there will be $10 million less supplied at every interest rate. Calculate the new equilibrium interest rate and quantity, and explain why the direction of the interest rate shift makes intuitive sense.

Interest Rate Qs Qd
5% 130 170
6% 135 150
7% 140 140
8% 145 135
9% 150 125
10% 155 110