Problem 2.2

(a)

Consider Figure 2.10 above. What would happen to the loan supply func tion, SL' in Figure 2.IO(iii) if the supply of deposits to the banking sector increased for any deposit rate, d?

(b)

(c)

What would the movement in the loan supply function calculated in part

(a) imply for the equilibrium interest rate and quantity of loans if both the old and new equilibria involve rationing?

Your answers to parts

(a) and

(b) should show that the loan supply function can move without causing the loan demand curve to move. What factors would cause a move in the loan demand curve? Would they also be likely to move the loan supply curve?