15.5 Equilibrium in the Capital Market
LO 5
Equilibrium in the capital market is determined where the quantity of
capital supplied by households equals the quantity of capital
demanded by firms.
Changes in the demand for capital or the supply of capital lead to
changes in the equilibrium interest rate and equilibrium levels of
investment and saving.
Technological improvement and population growth lead to increases
in both the demand for and the supply of capital. Continual
technological improvement and population growth can therefore
explain the ongoing growth in the capital stock with little or no trend
in the real interest rate.