4. At equilibrium, the quantity of funds demanded is equal to the quantity of funds supplied.
a. If the interest rate in the market is greater than the equilibrium rate, the quantity of funds demanded would be smaller than the quantity of funds supplied. Lenders would compete for borrowers, driving the interest rate down.
b. If the interest rate in the market is less than the equilibrium rate, the quantity of funds demanded would be greater than the quantity of funds supplied. The shortage of loanable funds
would result in upward pressure on the interest rate.
5. The supply and demand for loanable funds depends on the real interest rate because the real rate reflects the true return to saving and the true cost of borrowing.
C. FYI: Present Value
1. Money today is more valuable than the same amount of money in the future.
2. When comparing dollar amounts received today versus dollar amounts to be received in the future, we use the method of present value.
3. The general formula if present value is that, if r is the interest rate, then an amount ($X) to be received in N years has a present value of: