The following graph shows the supply of and demand for capital in a market over

Question

The following graph shows the supply of and demand for capital in a market over the last year. You can see that the demand for capital has increased over the last year (the demand curve shifted to the right). Place the black X at the equilibrium interest rate and the quantity of capital. INTEREST RATE, r l%) 20 18 16 14 12 10 Equilibrium 0 2 468 10 12 14 1618 20 CAPITAL (Billions of dollars The market interest rate increased by 2.0%, and the amount of capital borrowed by billion. Which of the following factors could be responsible for the change in demand shown in the graph? O The Federal Reserve (the Fed) decided to relax its monetary policy and expanded the money supply New technological advances opened up more production opportunities for businesses. O Expected inflation decreased. Households began saving a greater percentage of their income.

Explanation / Answer

The market interest rate increased by 2%, and the amount of capital borrowed increased by $4 billion Since the demand curve is shifting to the right, a factor other than a change in interest rates is responsible for the increase in demand for capital. The demand for capital depends on incentives for business investment in an economy. New technological advances opened up more production opportunities for businesses.

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