Question 1

Which combination of events could have caused the equilibrium interest rate to fall and the equilibrium quantity of loanable funds (both borrowed and loaned) to rise?

Accepted Answer

A)   Firms are more pessimistic, and governments run fewer deficits.
B)   A baby boom begins, and investor confidence rises.
C)   People have lower time preferences, and governments run larger deficits.
D)   People have lower time preferences, and capital is more productive.
E)   More individuals are middle-aged, and income increases.

Question 2

The Fisher equation relates:

Accepted Answer

A)   time preferences to the level of borrowing.
B)   nominal interest rates to the level of borrowing.
C)   real interest rates to the level of borrowing.
D)   real interest rates, nominal interest rates, and inflation.
E)   real interest rates, nominal interest rates, and the level of saving.

Question 3

Smiley Myrus owns a large corporation that is building a new shopping mall in Winston-Salem,North Carolina.In all likelihood,Smiley's firm:

Accepted Answer

A)   is a supplier of loanable funds.
B)   pays a higher rate of interest than most borrowers, based on the Fisher equation.
C)   is a borrower of loanable funds.
D)   pays a lower rate of interest than most borrowers, based on the Fisher equation.
E)   would loan its profits to foreign entities.

Question 4

Assuming inflation is positive,the real interest rate:

Accepted Answer

A)   must always be larger than the nominal interest rate.
B)   must always be smaller than the nominal interest rate.
C)   could be larger or smaller than the nominal interest rate, depending on the rate of inflation.
D)   would normally be larger than the nominal interest rate.
E)   increases exactly as fast as inflation.

Question 5

Assume you put money into an asset that pays you 7% interest and inflation is 5%.Which statement is correct?

Accepted Answer

A)   This means the nominal rate of interest is 7% and the real rate is 5%.
B)   This means the real rate of interest is 2%.
C)   The textbook states that all interest rates would be assumed to be the real rate; thus, the nominal rate is 12%.
D)   This means the nominal rate of interest is 35%.
E)   If the rate of inflation falls, your real rate of interest from this asset would also fall.

Question 6

Refer to the following graph to answer the questions that follow.
 
-Assuming the figure represents the market for loanable funds:

Accepted Answer

A)   line 1 represents savings and point A would be a quantity supplied of loanable funds.
B)   line 1 represents investment demand and point C represents a quantity of loanable funds.
C)   the vertical axis represents investment demand because investment demand is completely inelastic.
D)   the horizontal axis represents the quantity of loanable funds and interest rate B represents a higher-than-equilibrium interest rate.
E)   line 1 represents savings and point C represents a quantity supplied of loanable funds.

Question 7

Refer to the following graph to answer the questions that follow.
 
-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 8

An increase in the supply of loanable funds means:

Accepted Answer

A)   borrowers want to borrow more at every interest rate.
B)   savers want to borrow more at every interest rate.
C)   borrowers want to borrow more at a specific interest rate.
D)   savers want to save more at a specific interest rate.
E)   savers want to save more at every interest rate.

Question 9

If interest rates rise:

Accepted Answer

A)   firms are willing to borrow more money because their rates of return have increased.
B)   households are willing to borrow more money because their rates of return have increased.
C)   firms are willing to borrow less money because their cost of borrowing has increased.
D)   foreign entities are willing to borrow more money because their rates of return have increased.
E)   it must mean that inflation has decreased because nominal rates have increased.

Question 10

The concept of the loanable funds market is:

Accepted Answer

A)   similar to that of the grocery store-goods are sold and money is borrowed to pay for them.
B)   the market by which lenders (savers)  and borrowers exchange funds for earlier availability at a premium, which is represented by the interest rate.
C)   similar to the notion of consumer and producer surplus, where the interest rate represents either consumer or producer surplus depending on who is doing the borrowing.
D)   the market by which borrowers (suppliers)  and lenders (demanders)  exchange funds for earlier availability at a premium, which is represented by the interest rate.
E)   that the interest rate is determined by multiplying the risk premium by the coefficient of pure interest.

Question 11

Assume inflation is occurring in a nation; the implication(s) is/are that:

Accepted Answer

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

Question 12

Refer to the following graph to answer the questions that follow.
 
-Assuming the figure represents the market for loanable funds,which of the following would represent a cut in corporate tax rates,causing business owners and managers to become more optimistic?

Accepted Answer

A)   a shift from line 1 to line 4
B)   movement from B to A
C)   a shift from line 2 to line 3
D)   movement from A to B
E)   a shift from line 3 to line 2

Question 13

The interest rate is:

Accepted Answer

A)   the price of labor.
B)   the price of land.
C)   both the price of capital and the price of labor.
D)   the price of loanable funds.
E)   the marginal rate of investment supply.

Question 14

Explain why the market for loanable funds is important.Be sure to address who are borrowers in this market and who are lenders.

Accepted Answer

Students' answers will vary.The market f...

Question 15

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 do not save.
E)   the willingness of firms to borrow.

Question 16

What does it mean if we say that in the United States,firms are "net borrowers," and how is this reflected in the market for loanable funds?

Accepted Answer

This means that although some firms are ...

Question 17

You are thinking about building a new mall.Your economic consultants say the mall will bring a 7% rate of return.Because you know that you can borrow as much money as you need for 5%:

Accepted Answer

A)   you will build the mall if it costs $50 million but not if it costs $100 million.
B)   assuming conditions do not change, you will build the mall no matter how much it costs.
C)   if the rate of return falls below 5%, you will still build the mall.
D)   assuming conditions do not change, you will not build the mall because a 2% net rate of return is just too small to be worth it.
E)   if the cost of borrowing rises to 8%, you would still build the mall.

Question 18

Every ________ requires a ________.

Accepted Answer

A)   savings dollar; foreign investment dollar
B)   investment dollar; savings dollar
C)   dollar of loanable funds; dollar of wages earned
D)   dollar of government borrowing; dollar of foreign borrowing
E)   dollar of exports; dollar of imports

Question 19

In a country,very old and very young people spend more than their incomes.Yet in that same country,the people who are middle-aged tend to save for retirement.If this scenario is true,it best describes:

Accepted Answer

A)   time preferences.
B)   nominal interest rates.
C)   the demand for loanable funds.
D)   consumption smoothing.
E)   consumption variance.

Question 20

You deposit $1,000.00 into an asset that pays 7% annual interest for eight years.At the end of the eight years,you would have:

Accepted Answer

A)   $1,000.00.
B)   $1,560.00.
C)   $1,718.19.
D)   $10,260.00.
E)   earned an effective yield of about 9%, or $1,605.78.

Exam 14: Savings, Investment, and the Market for Loanable Funds

Explain why the market for loanable funds is important.Be sure to address who are borrowers in this market and who are lenders.

Correct AnswerverifiedStudents' answers will vary.The market f...View AnswerShow Answer

The concept of the loanable funds market is:

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The Fisher equation relates:

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If interest rates rise:

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Assume inflation is occurring in a nation; the implication(s) is/are that:

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In a country,very old and very young people spend more than their incomes.Yet in that same country,the people who are middle-aged tend to save for retirement.If this scenario is true,it best describes:

Correct AnswerverifiedShow Answer

Refer to the following graph to answer the questions that follow. -Assuming the figure represents the market for loanable funds:

Correct AnswerverifiedShow Answer

Refer to the following graph to answer the questions that follow. -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

Savings represents:

Correct AnswerverifiedShow Answer

Every ________ requires a ________.

Correct AnswerverifiedShow Answer

An increase in the supply of loanable funds means:

Correct AnswerverifiedShow Answer

What does it mean if we say that in the United States,firms are "net borrowers," and how is this reflected in the market for loanable funds?

Correct AnswerverifiedThis means that although some firms are ...View AnswerShow Answer

The interest rate is:

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Which combination of events could have caused the equilibrium interest rate to fall and the equilibrium quantity of loanable funds (both borrowed and loaned) to rise?

Correct AnswerverifiedShow Answer

You are thinking about building a new mall.Your economic consultants say the mall will bring a 7% rate of return.Because you know that you can borrow as much money as you need for 5%:

Correct AnswerverifiedShow Answer

Smiley Myrus owns a large corporation that is building a new shopping mall in Winston-Salem,North Carolina.In all likelihood,Smiley's firm:

Correct AnswerverifiedShow Answer

Assuming inflation is positive,the real interest rate:

Correct AnswerverifiedShow Answer

Assume you put money into an asset that pays you 7% interest and inflation is 5%.Which statement is correct?

Correct AnswerverifiedShow Answer

You deposit $1,000.00 into an asset that pays 7% annual interest for eight years.At the end of the eight years,you would have:

Correct AnswerverifiedShow Answer

Refer to the following graph to answer the questions that follow. -Assuming the figure represents the market for loanable funds,which of the following would represent a cut in corporate tax rates,causing business owners and managers to become more optimistic?

Correct AnswerverifiedShow Answer

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Every requires a .

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This means that although some firms are ...
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