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Question
Microeconomics
Posted 9 months ago
Which of the following best describes how the two axes should be labeled in a model that shows the relationship between borrowers and savers?
Choose 1 answer:
(A) Real interest rate on the vertical axis; quantity of loanable funds on the horizontal axis
(B) Nominal interest rates on the vertical axis; quantity of money on the horizontal axis
(c) Price level on the vertical axis, quantity of loanable funds on the horizontal axis
(D) Exchange rate on the vertical axis; quantity of loanable funds on the horizontal axis
(E) Real interest rate on the vertical axis, quantity of money on the horizontal axis
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Answer from Sia
Posted 9 months ago
Solution
a
Real Interest Rate: The real interest rate is the interest rate adjusted for inflation, reflecting the true cost of borrowing and the true return on savings
b
Quantity of Loanable Funds: This represents the total amount of funds available for borrowing in the financial market
c
Correct Labeling: In a model showing the relationship between borrowers and savers, the vertical axis should represent the real interest rate, and the horizontal axis should represent the quantity of loanable funds
Answer
(A) Real interest rate on the vertical axis; quantity of loanable funds on the horizontal axis
Key Concept
The relationship between borrowers and savers is best represented by the real interest rate and the quantity of loanable funds.
Explanation
The real interest rate reflects the true cost of borrowing and the true return on savings, while the quantity of loanable funds represents the total funds available for borrowing. This combination accurately captures the dynamics between borrowers and savers.
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