Demand and Supply in Financial Markets

Self-Check Questions

In the financial market, what causes a movement along the demand curve? What causes a shift in the demand curve?

Hint:

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.

In the financial market, what causes a movement along the supply curve? What causes a shift in the supply curve?

Hint:

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.

If a usury law limits interest rates to no more than 35%, what would the likely impact be on the amount of loans made and interest rates paid?

Hint:

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.

Which of the following changes in the financial market will lead to a decline in interest rates:

  1. a rise in demand
  2. a fall in demand
  3. a rise in supply
  4. a fall in supply

Hint:

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.

Which of the following changes in the financial market will lead to an increase in the quantity of loans made and received:

  1. a rise in demand
  2. a fall in demand
  3. a rise in supply
  4. a fall in supply

Hint:

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.