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    Risk-Free Interest Rate & Corresponding Supply & Demand Curve

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    What initial effect, if any, does each of the following shocks have on Japan's real risk-free interest rate? Please use supply and demand curve to support conclusion (please label axes & curve).

    a) A decrease in the Japanese money supply with no changes in prices
    b) A decrease in global lending to Japan
    c) An increase in private saving in Japan
    d) An increase in the Japanese governments budget deficit
    e) Speculative short-term international capital inflows to Japan
    f) An increase in Japan's real GDP
    g) A rise in Japan's expected inflation rate.

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    Solution Preview

    See the attachment.

    The key to answering these questions is to understand that when the supply of loanable funds increases, the interest rate will fall, and vice versa. This is because the interest rate is essentially the price of a loan. When more funds are available, the price must fall so that supply equals demand. Likewise, an increase in the demand for loanable funds will increase the interest rate, and vice versa.

    A. When the money ...

    Solution Summary

    The solution discusses the effects on risk-free interest rate and corresponding supply and demand curve.