a. If transfers between the two markets were costly, interest rates would be different in the two areas. Area \(\mathrm{Y}\), with the relatively young population, would have less in savings accumulation and stronger loan demand. Area O, with the relatively old population, would have more savings accumulation and weaker loan demand as the members of the older population have already purchased their houses, and are less consumption oriented. Thus, supply/demand equilibrium would be at a higher rate of interest in Area Y.

b. Yes. Nationwide branching, and so forth, would reduce the cost of financial transfers between the areas. Thus, funds would flow from Area \(\mathrm{O}\) with excess relative supply to Area Y with excess relative demand. This flow would increase the interest rate in Area \(\mathrm{O}\) and decrease the interest rate in \(\mathrm{Y}\) until the rates were roughly equal, the difference being the transfer cost.