Economics: The Basics 1st Edition by Mike Mandel

Exercise 9

In 2004 and 2005 the economy was strong, and so was the demand for loans by households and businesses. In fact, debt rose faster than it had in almost 20 years. Economists expected interest rates to rise. Instead the interest rate on 10-year Treasury bonds at the end of 2005 was 4.5 percent-barely higher than the 4.3 percent interest rate at the end of 2003. One explanation was that booming foreign economies, like China and Russia, were saving money and therefore had a lot of money to lend. Illustrate a combination of strong loan demand and increased supply of lending on a supply-demand diagram.