Question 1

"Firms borrow to fund an investment if and only if the expected return on the investment is greater than the interest rate on the loan." Explain this statement.

Accepted Answer

A firm borrows money in order to invest ...

Question 2

If a depositor puts money in the bank, the interest rate that the bank will pay the depositor

Accepted Answer

A)   is the real rate of interest.
B)   is the nominal rate of interest.
C)   is the inflation-adjusted rate of interest.
D)   must by law equal the rate of inflation times the bank's risk premium.
E)   must by law equal the rate of inflation plus the bank's risk premium.

Question 3

Refer to the following graph to answer the next questions:
 
-Assuming the figure represents the market for loanable funds, and that point C represents $40 million and point D represents $70 million, then it would be true that

Accepted Answer

A)   at interest rate A, the market is in equilibrium.
B)   at interest rate A, there is a surplus of $30 million of loanable funds.
C)   at interest rate A, there is a shortage of $30 million of loanable funds.
D)   because there is a disequilibrium at interest rate A, interest rates must fall.
E)   the interest rate represented by A must be greater than that represented by B.

Question 4

How do rising incomes and wealth, whether domestically or abroad, boost a nation's supply of loanable funds?

Accepted Answer

People who have, or make, more money tha...

Question 5

Refer to the following graph to answer the next questions:
 
-Assuming the figure represents the market for loanable funds, it would be true that

Accepted Answer

A)   line 1 represents savings supply) , and line 2 represents investment demand) .
B)   the vertical axis represents the interest rate, and the distance between points C and D represents the surplus of loanable funds at interest rate A.
C)   line 1 represents investment demand, and line 2 represents savings.
D)   the vertical axis represents the quantity of funds lent and borrowed, whereas the distance between points C and D represents the shortage of loanable funds at interest rate A.
E)   line 1 represents the interest rate, and line 2 represents the quantity of savings.

Question 6

Savings represents

Accepted Answer

A)   the demand for loanable funds.
B)   the supply of loanable funds.
C)   the minimum interest rate people are willing to accept i.e., the "reservation" interest rate) .
D)   only funds supplied by foreigners, because Americans don't save.
E)   the willingness of firms to borrow.

Question 7

The measurement of personal savings may be distorted by

Accepted Answer

A)   increased college tuition costs.
B)   reduced college tuition costs.
C)   higher marginal tax rates.
D)   greater levels of home equity.
E)   lower levels of home equity.

Question 8

The fact that people prefer to receive goods and services sooner rather than later is referred to as

Accepted Answer

A)   economic impatience.
B)   time preferences.
C)   consumption smoothing.
D)   the value of promptness.
E)   dissaving over time.

Question 9

List the factors of demand for loanable funds, and explain what would cause each of them to shift the demand curve rightward.

Accepted Answer

The factors of demand for loanable funds...

Question 10

If household wealth rises and capital becomes less productive, we would correctly say that

Accepted Answer

A)   the new equilibrium quantity of loanable funds would decrease, but we would be unable to tell if the new equilibrium interest rate would be higher or lower than the original.
B)   the new equilibrium quantity of loanable funds would increase, but we would be unable to tell if the new equilibrium interest rate would be higher or lower than the original.
C)   the new equilibrium quantity of loanable funds would be indeterminate, but we would be certain the new equilibrium interest rate would be higher than the original.
D)   the new equilibrium quantity of loanable funds would be indeterminate, but we would be certain the new equilibrium interest rate would be less than the original.
E)   based on this information and because both changes would affect the demand for loanable funds in the opposite way, we would be unable to say anything about the relationship of the new equilibrium interest rate and quantity to the original interest rate and quantity.

Question 11

If interest rates rise,

Accepted Answer

A)   foreign entities that are borrowers of funds will borrow less.
B)   governments that are savers of funds will save less.
C)   households that are savers of funds will save more.
D)   businesses that are savers of funds will borrow less.
E)   it will reduce consumption smoothing.

Question 12

Assume inflation is occurring in a nation; the implications)

Accepted Answer

A)   are that both real and nominal interest rates are positive.
B)   are that both real and nominal interest rates are negative.
C)   is that the nominal interest rate exceeds the real interest rate.
D)   is that the real rate of interest exceeds the nominal rate of interest.
E)   is that time preferences in the nation have risen.

Question 13

If everyone began feeling better about the economic future, "animal spirits" would become

Accepted Answer

A)   negative.
B)   more positive and firms would invest more, causing the demand for loanable funds to increase.
C)   more positive and firms would invest more, causing the supply of loanable funds to increase.
D)   more positive and firms would invest more, causing the supply of loanable funds to decrease.
E)   more positive and firms would invest more, causing the demand for loanable funds to decrease.

Question 14

You borrow $10,000 today at a nominal rate of 5 percent; inflation for the past 10 years has been exactly 2 percent. Today, inflation instantly rises to 7 percent and stays that way for the duration of your loan. Based on the above information, ceteris paribus all else equal) , today

Accepted Answer

A)   the real rate of interest on your loan is 14 percent.
B)   the real rate of interest on your loan was previously 10 percent and is now 35 percent.
C)   the real rate of interest on your loan is now -2 percent.
D)   you will pay the lender back exactly $9,500.
E)   you will pay the lender back exactly $10,700.

Question 15

Refer to the following graph to answer the next questions:
 
-In the figure, at an interest rate of 5 percent, the

Accepted Answer

A)   quantity demanded of loanable funds equals the quantity supplied of loanable funds, and equilibrium is reached.
B)   quantity demanded of loanable funds is greater than the quantity supplied of loanable funds, and there is a surplus of loanable funds.
C)   demand for loanable funds is greater than the supply of loanable funds, and there is a shortage of loanable funds.
D)   quantity demanded of loanable funds is greater than the quantity supplied of loanable funds, and there is a shortage of loanable funds.
E)   quantity demanded of loanable funds is less than the quantity supplied of loanable funds, and there is a surplus of loanable funds.

Question 16

Refer to the following graph to answer the next five questions:
 
-Assuming the figure represents the market for loanable funds, which of the following would represent the government running a larger budget deficit?

Accepted Answer

A)   a shift from line 1 to line 4
B)   a shift from line 4 to line 1
C)   a shift from line 2 to line 3
D)   a shift from line 3 to line 2
E)   a new shortage of loanable funds represented by the distance from C to D

Question 17

Those with the least patience

Accepted Answer

A)   have the greatest time preference.
B)   have the least time preference.
C)   will demand a higher nominal interest rate but not a higher real rate.
D)   will save the most.
E)   will engage in the most consumption smoothing.

Question 18

Explain how consumption smoothing involves the loanable funds market.

Accepted Answer

Consumption smoothing means that young p...

Question 19

Refer to the following graph to answer the next five questions:
 
-Assuming the figure represents the market for loanable funds, which of the following would represent an increase in household wealth?

Accepted Answer

A)   a shift from line 1 to line 4
B)   a shift from line 4 to line 1
C)   a shift from line 2 to line 3
D)   movement from A to B
E)   a new shortage of loanable funds represented by the distance from C to D

Question 20

The demand for loanable funds increases by the exact same percentage that the supply of loanable funds decreases. This would cause the equilibrium

Accepted Answer

A)   quantity of loanable funds to decrease and the equilibrium interest rate to increase.
B)   quantity of loanable funds to increase and the equilibrium interest rate to decrease.
C)   quantity of loanable funds to increase, but the effect on the equilibrium interest rate would be uncertain.
D)   interest rate to increase, resulting in a new higher equilibrium quantity.
E)   interest rate to increase, but the equilibrium quantity would remain unchanged.

Exam 9: Savings, Interest Rates, and the Market for Loanable Funds

Explain how consumption smoothing involves the loanable funds market.

Correct AnswerverifiedConsumption smoothing means that young p...View AnswerShow Answer

List the factors of demand for loanable funds, and explain what would cause each of them to shift the demand curve rightward.

Correct AnswerverifiedThe factors of demand for loanable funds...View AnswerShow Answer

Those with the least patience

Correct AnswerverifiedShow Answer

Assume inflation is occurring in a nation; the implications)

Correct AnswerverifiedShow Answer

If household wealth rises and capital becomes less productive, we would correctly say that

Correct AnswerverifiedShow Answer

If interest rates rise,

Correct AnswerverifiedShow Answer

How do rising incomes and wealth, whether domestically or abroad, boost a nation's supply of loanable funds?

Correct AnswerverifiedPeople who have, or make, more money tha...View AnswerShow Answer

Refer to the following graph to answer the next five questions: -Assuming the figure represents the market for loanable funds, which of the following would represent the government running a larger budget deficit?

Correct AnswerverifiedShow Answer

Refer to the following graph to answer the next five questions: -Assuming the figure represents the market for loanable funds, which of the following would represent an increase in household wealth?

Correct AnswerverifiedShow Answer

If everyone began feeling better about the economic future, "animal spirits" would become

Correct AnswerverifiedShow Answer

The fact that people prefer to receive goods and services sooner rather than later is referred to as

Correct AnswerverifiedShow Answer

Refer to the following graph to answer the next questions: -Assuming the figure represents the market for loanable funds, it would be true that

Correct AnswerverifiedShow Answer

"Firms borrow to fund an investment if and only if the expected return on the investment is greater than the interest rate on the loan." Explain this statement.

Correct AnswerverifiedA firm borrows money in order to invest ...View AnswerShow Answer

The measurement of personal savings may be distorted by

Correct AnswerverifiedShow Answer

Refer to the following graph to answer the next questions: -Assuming the figure represents the market for loanable funds, and that point C represents $40 million and point D represents $70 million, then it would be true that

Correct AnswerverifiedShow Answer

If a depositor puts money in the bank, the interest rate that the bank will pay the depositor

Correct AnswerverifiedShow Answer

The demand for loanable funds increases by the exact same percentage that the supply of loanable funds decreases. This would cause the equilibrium

Correct AnswerverifiedShow Answer

You borrow $10,000 today at a nominal rate of 5 percent; inflation for the past 10 years has been exactly 2 percent. Today, inflation instantly rises to 7 percent and stays that way for the duration of your loan. Based on the above information, ceteris paribus all else equal) , today

Correct AnswerverifiedShow Answer

Refer to the following graph to answer the next questions: -In the figure, at an interest rate of 5 percent, the

Correct AnswerverifiedShow Answer

Savings represents

Correct AnswerverifiedShow Answer

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Consumption smoothing means that young p...
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The factors of demand for loanable funds...
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People who have, or make, more money tha...
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A firm borrows money in order to invest ...
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