Homework 4.2 Demand and Supply in Financial Markets

The table below shows the amount of savings and borrowing in a market for student loans, measured in millions of dollars, at various interest rates. Imagine that there is an increase in the number of students going to college, which increases the quantity demanded of student loans by $60 million at each interest rate. What is the new equilibrium interest rate in the financial market for student loans? Hint: Begin by increasing each level of quantity demanded by $60 million.

At 5.1%, quantity supplied is equal to quantity demanded (QS=QD=$280 million). This is the new equilibrium interest rate.

Suppose the market for credit cards is currently in equilibrium. What will be the consequence if the government sets a limit on credit card interest rates that is above the market equilibrium? Select the correct answer below: A surplus A shortage More people wanting credit cards than lenders wanting to supply them. Nothing

Nothing If the government sets a limit on interest rates that is above the current equilibrium, this will not have any impact on the market for credit cards.

Suppose the market for credit cards is initially in equilibrium. What will happen to price and quantity if there is an increase in the supply of credit cards? Please select two correct answers. Select all that apply: The interest rate will increase. The interest rate will decrease. The quantity will increase. The quantity will decrease.

The interest rate will decrease. The quantity will increase. When supply in the market for credit cards increases, the equilibrium interest rate will fall, and the equilibrium quantity will rise.

Which of the following statements about financial markets is not true? Select the correct answer below: The law of supply continues to apply in financial markets. The law of demand continues to apply in financial markets. Those who borrow money are on the demand side of the financial market. The market for credit cards is not an example of a financial market.

The market for credit cards is not an example of a financial market. Financial markets link those who wish to supply financial capital (i.e., savings) with those who demand financial capital (i.e., borrowing). Thus, the market for borrowing money with credit cards is a straightforward example of a financial market.

Suppose the market for credit cards is initially in equilibrium. If both the supply of and demand for credit cards increases, what is the impact on quantity and the interest rate? Illustrate by shifting both curves in the respective directions.

When both demand and supply shift to the right, the quantity will increase. However, the change in the interest rate will depend on how much each curve shifts, so this change is ambiguous.

Illustrate in what direction the supply curve of financial capital will have to shift in order to cause the equilibrium interest rate to fall, and the equilibrium quantity to rise.

When supply in the market for credit cards increases, the equilibrium interest rate will fall, and the equilibrium quantity will rise.

Which of the following is directly associated with usury law? Select the correct answer below: a floor on the maximum interest rate a ceiling on the maximum interest rate lowering the equilibrium rate of return always increasing demand

a ceiling on the maximum interest rate Usury laws in the United States set an upper limit (ceiling) on the interest rates that can be charged.

Which of the following gives the definition of usury law? Correct! You nailed it. The common relationship that a higher price leads to a greater quantity supplied and a lower price leads to a lower quantity supplied. The economic policies that involve government spending and taxes. A law that imposes an upper limit on the interest rate that lenders can charge. The government laws to regulate prices instead of letting market forces determine prices.

A law that imposes an upper limit on the interest rate that lenders can charge. An usury law is defined as a law that imposes an upper limit on the interest rate that lenders can charge. In the United States, these laws are mostly erected by states.

Suppose the market for savings accounts is initially in equilibrium. If the government institutes a minimum interest rate on savings accounts that is above the current equilibrium, which of the following will result? Select the TWO correct answers. A surplus of people looking to save money A shortage of people looking to save money A surplus of banks looking to supply savings accounts A shortage of banks looking to supply bank accounts

A surplus of people looking to save money A shortage of banks looking to supply bank accounts When the government institutes a minimum interest rate that is above the market interest rate, more people will want to save at this higher interest rate, but fewer banks will want to make savings accounts available.

Sally is a great employee that works for a prominent company that recently announced expansion. Sally decides to borrow financial capital to purchase a house. What could be one reason Sally is increasing her financial capital demand now? Select the correct answer below: Sally is unsure of the future of the government. Sally's consumer confidence is low. Sally's consumer confidence is high. Sally predicts an economic downturn.

Sally's consumer confidence is high. When consumers are confident in the future of the market, they demand more capital because they are confident in their abilities to repay loans. Sally choses to borrow financial capital in the way of a mortgage because her consumer confidence is high.

If the interest rate falls below the equilibrium point, which of the following occurs in the financial market? Select the two correct answers below. Select all that apply: Excess demand occurs. Credit card firms will lower interest rates to attract customers. Credit card companies will see an opportunity to raise interest rates. Firms are eager to supply loans to credit card customers.

Excess demand occurs. Credit card companies will see an opportunity to raise interest rates. When the interest rate falls below the equilibrium, excess demand, or a shortage of funds, occurs in the market. Credit card firms will believe that there is an opportunity to raise interest rates because they have many eager customers.

People gain confidence that the economy is growing and that their jobs are secure. How does this impact the demand for financial capital? Select the correct answer below: The demand for financial capital increases. The demand for financial capital decreases. The demand is not affected.

The demand for financial capital increases. When consumers are confident they will be able to pay back funds borrowed in the future, they are more likely to demand or borrow funds now.

What do you expect to happen to the supply curve of mutual funds (investment funds) if the interest rates for substitute investment, savings bonds, increase by a very significant amount? Select the correct answer below: This will shift the supply curve of mutual funds to the right. This will shift the supply curve of mutual funds to the left. The supply curve will not change, but the quantity supplied will decrease. The supply curve will not change, but the supply demanded will increase.

This will shift the supply curve of mutual funds to the left. When Interest rates rise dramatically, some investments in mutual funds will move to savings bonds, transferring some of the supply of mutual funds to savings bonds. This will shift the supply curve of mutual funds to the left. However, because interest rates of mutual funds are not changing, neither the demand curve nor the quantity demanded will change.

Of the following outcomes, which two would result from a government intervention that sets a maximum interest rate that is below the equilibrium rate in the market for credit cards? Select all that apply: a shortage of credit cards a surplus of credit cards a shortage of people saving money a surplus of people saving money

a shortage of credit cards a shortage of people saving money When the government institutes a maximum interest rate that is below the market interest rate, fewer people will want to save at this lower interest rate, but more will want to borrow (obtain credit cards), creating a shortage of people saving money. Conversely, credit card companies will not want to lend as much money since the rate of return is low for them. Thus, there will be a shortage of credit cards in the market.

Suppose the market for savings accounts is currently in equilibrium. Of the following consequences, which would result from a government intervention that sets a maximum interest rate that is below the equilibrium rate in the market? Select the two correct answers below. a surplus of people saving money a shortage of people saving money a surplus of banks supplying saving accounts a shortage of banks supplying savings accounts

a shortage of people saving money a surplus of banks supplying saving accounts When the government institutes a minimum interest rate that is below the market interest rate, fewer people will want to save at this lower interest rate, but more banks will want to make savings accounts available. This results in a shortage of people saving and a surplus of savings accounts.

Which of the following is the result of a government intervention that sets a maximum interest rate in the market for car loans that is above the equilibrium interest rate? Select the correct answer below: a surplus of car loans a shortage of car loans an increase in the equilibrium interest rate nothing will change

nothing will change If a maximum interest rate for car loans is set above the equilibrium interest rate, no change will occur.

Price ceilings typically affect which of the following? Not quite right - check out the answer explanation. cars milk rent CEO salaries

rent A price ceiling is a legal maximum price that one pays for some good or service. A government imposes price ceilings in order to keep the price of some necessary good or service affordable. Rent is likely to have a price ceiling in an effort to keep prices low for those needing them. This is a necessity that could disproportionately affect the poor. An unintended consequence is that shortage occurs and some people are unable to get the goods. Additionally, product quality may suffer. Milk, cars and CEO salaries are not generally affected by price ceilings.

Those who save money are on the _________ side of the financial market. Those who borrow money are on the _________ side of the financial market. Select the correct answer below: demand; demand demand; supply supply; demand supply; supply

supply; demand Those who save money (or make financial investments, which is the same thing), whether individuals or businesses, are on the supply side of the financial market. Those who borrow money are on the demand side of the financial market