Answer:
a. Wayne projects that if he takes out a loan to open another gym franchise, he will earn a lower return than the interest rate he would have to pay, so he decides against it.
e. 10%
e. $50 billion
Explanation:
Point A represents a situation in which projects that promise a rate of return lower than the prevailing interest rate will not be funded.
Since Wayne's expansion of his gym franchise promises a return which is lower than the interest rate he would have to pay, he will not choose to expand. This scenario aligns with point A. Each of the three remaining scenarios also correspond to a quadrant on the graph.
Janine decides to take out a loan and expand because she projects a rate of return higher than the interest rate, represented by the demand curve above equilibrium (the upper left).
Jeff providing a loan to his brother indicates that the expected return is higher than the interest rate the brother will be paying Jeff. Jeff's situation is represented by the supply curve below equilibrium (the lower left). Recall that for supply/demand graphs, the area below the demand curve and above the supply curve to the left of the equilibrium point is total surplus because exchanges are being made between the buyers and sellers.
Lastly, Carly deciding whether or not to purchase a corporate bond is equivalent to her deciding whether or not to provide a loan to the corporation issuing the bond. Her decision not to buy is due to her unwillingness to accept an interest rate below 14%, and thus she is represented by the supply curve above equilibrium (the upper right).
The market for loanable funds operates much as a normal supply and demand model, with the interest rate on the vertical axis (the price of borrowing) and quantity of loanable funds on the horizontal axis. In order to determine the market interest rate and quantity of available loanable funds, you must find the equilibrium point for the market supply and demand curves. Using the information presented in the graph, you can see that the prevailing market interest rate is 10% and there are $50 billion in loans made.
