Question 1

You are thinking about building a new mall. Your trusted economic consultants say the mall will bring a 7 percent real rate of return. Because you know that you can borrow the necessary money at 5 percent,

Accepted Answer

A)   you will build the mall only if you expect inflation to remain below 2 percent.
B)   you will definitely build the mall.
C)   you will build the mall, unless you expect inflation to rise above 12 percent.
D)   you will build the mall, so long as you expect inflation to remain below 7 percent.
E)   you will build the mall, so long as you expect inflation to remain below 5 percent.

Question 2

The correct production timeline is

Accepted Answer

A)   investment occurs, dollars are borrowed, and output is produced.
B)   dollars are borrowed, investment occurs, and output is produced.
C)   output is produced, dollars are borrowed, and investment occurs.
D)   savings occurs, output is produced, and dollars are borrowed.
E)   borrowing occurs, output is produced, and investment occurs.

Question 3

If foreign entities save less and governments run more deficits, 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 4

Wealth increases in the United States because the value of the stock market increases; if all else is equal, this would cause

Accepted Answer

A)   a larger gap between the real and nominal rates of interest.
B)   the demand for loanable funds to increase.
C)   the supply of loanable funds to increase.
D)   the supply of loanable funds to decrease.
E)   corporations to be more willing to borrow.

Question 5

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 ...

Question 6

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

Accepted Answer

The factors of supply for loanable funds...

Question 7

The demand for loanable funds decreases while the supply simultaneously increases. 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, but the new equilibrium quantity would be uncertain.
E)   interest rate to decrease, but the new equilibrium quantity would be uncertain.

Question 8

Refer to the following graph that describes income and consumption patterns over a typical life cycle to answer the next questions:
 
-Which part of the accompanying graph depicts borrowing?

Accepted Answer

A)   curve A
B)   curve B
C)   region C
D)   region D
E)   region E

Question 9

Firms expect more sales and profits in the near future; this would cause

Accepted Answer

A)   the demand for loanable funds to increase.
B)   the supply of loanable funds to increase.
C)   both the demand and supply of loanable funds to increase.
D)   both the demand and supply of loanable funds to decrease.
E)   lower interest rates in the near future.

Question 10

"Interest is the reward for saving." Or, alternatively, "interest is the opportunity cost of consumption." Explain how these two statements are equivalent.

Accepted Answer

Both statements contrast money saved wit...

Question 11

One argument that is made concerning the low rate of saving in the United States is that

Accepted Answer

A)   although savings is at almost historically low levels, the savings rate conceals the "hidden savings" from people concealing money in various places in their houses.
B)   although savings is at almost historically low levels, the savings rate conceals the "hidden savings" from people's equity in their homes.
C)   the next generation has a lower time preference than previous ones.
D)   the next generation is just plain lazy.
E)   the marginal benefit of saving has fallen relative to the marginal benefit of spending.

Question 12

If you deposit money in the bank, in essence, you are

Accepted Answer

A)   a supplier of funds, since the bank simply is an intermediary between those who want to borrow loanable funds and those who are willing to lend them depositors) .
B)   a borrower, since all bank funds are borrowed from the federal government.
C)   a supplier of funds, since the bank loans money to the government for daily operations.
D)   neither a borrower nor supplier of funds in this case, since you have neither lent nor borrowed money.
E)   not a supplier of funds, since mutual funds are the source of lending to firms.

Question 13

Every dollar borrowed

Accepted Answer

A)   represents a dollar leaving the circular flow.
B)   requires a dollar to be saved.
C)   represents a piece of capital.
D)   requires the supply of loanable funds to increase.
E)   causes inflation.

Question 14

Which event could be expected to shift a nation's demand for loanable funds, as shown in the accompanying graph?

Accepted Answer

A)   an increase in the productivity of capital
B)   a decrease in investor confidence
C)   an increase in consumer wealth
D)   an increase in time preferences
E)   a rise in the number of workers in their prime earning years

Question 15

Borrowers in the loanable funds market consist of

Accepted Answer

A)   governments and firms.
B)   banks, foreign governments, and bonds.
C)   mutual fund firms, stock exchanges, and banks.
D)   households and foreign entities.
E)   arbitrage companies, banks, and firms.

Question 16

The real interest rate

Accepted Answer

A)   equals the nominal rate minus the prime rate.
B)   increases as inflation increases, ceteris paribus.
C)   is what you really pay if you borrow versus what you think you are paying.
D)   equals the nominal rate plus the rate of inflation.
E)   equals the nominal rate minus the rate of inflation.

Question 17

Which event could be expected to shift a nation's demand for loanable funds, as shown in the accompanying graph?

Accepted Answer

A)   an increase in the productivity of capital
B)   a decrease in investor confidence
C)   a decrease in consumer wealth
D)   an increase in time preferences
E)   a drop in the number of retired workers

Question 18

Why does increased productivity of capital shift the demand for loanable funds?

Accepted Answer

A)   More productive capital generates more profits, reducing the need for firms to borrow money.
B)   More productive capital means greater consumption of raw materials, which must be paid for with borrowed money.
C)   More productive capital boosts competition, which leads to greater demand for loans to keep up with rival firms.
D)   More productive capital reduces workers' incentive to work, which leads to greater demand for loans in order to pay workers more.
E)   More productive capital earns more money, which justifies a higher interest rate on money borrowed to buy the capital.

Question 19

Why does it make sense to consider an interest rate a price, even though interest rates are quoted in percent rather than in dollars?

Accepted Answer

The interest on a loan is the money paid...

Question 20

If the federal government taxes the interest rate that savers receive,

Accepted Answer

A)   the rate of return to savers increases because of transfer payments, and people save more.
B)   the demand for loanable funds increases.
C)   the supply of loanable funds increases.
D)   the supply of loanable funds decreases.
E)   corporations are more willing to borrow.

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

If you deposit money in the bank, in essence, you are

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Every dollar borrowed

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If foreign entities save less and governments run more deficits, we would correctly say that

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Wealth increases in the United States because the value of the stock market increases; if all else is equal, this would cause

Correct AnswerverifiedShow Answer

Which event could be expected to shift a nation's demand for loanable funds, as shown in the accompanying graph?

Correct AnswerverifiedShow Answer

One argument that is made concerning the low rate of saving in the United States is that

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The demand for loanable funds decreases while the supply simultaneously increases. This would cause the equilibrium

Correct AnswerverifiedShow Answer

If the federal government taxes the interest rate that savers receive,

Correct AnswerverifiedShow Answer

Refer to the following graph that describes income and consumption patterns over a typical life cycle to answer the next questions: -Which part of the accompanying graph depicts borrowing?

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The real interest rate

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Why does increased productivity of capital shift the demand for loanable funds?

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The correct production timeline is

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"Interest is the reward for saving." Or, alternatively, "interest is the opportunity cost of consumption." Explain how these two statements are equivalent.

Correct AnswerverifiedBoth statements contrast money saved wit...View AnswerShow Answer

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 ...View AnswerShow Answer

Which event could be expected to shift a nation's demand for loanable funds, as shown in the accompanying graph?

Correct AnswerverifiedShow Answer

Firms expect more sales and profits in the near future; this would cause

Correct AnswerverifiedShow Answer

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

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

You are thinking about building a new mall. Your trusted economic consultants say the mall will bring a 7 percent real rate of return. Because you know that you can borrow the necessary money at 5 percent,

Correct AnswerverifiedShow Answer

Borrowers in the loanable funds market consist of

Correct AnswerverifiedShow Answer

Why does it make sense to consider an interest rate a price, even though interest rates are quoted in percent rather than in dollars?

Correct AnswerverifiedThe interest on a loan is the money paid...View AnswerShow Answer

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Both statements contrast money saved wit...
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Students' answers will vary. The market ...
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Correct Answer
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The factors of supply for loanable funds...
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The interest on a loan is the money paid...
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