Question 1

Suppose the market for loanable funds is in equilibrium. If disposable income increases, the equilibrium real interest rate and the quantity of loanable funds .

Accepted Answer

A)  rises; increases 
B)  falls; increases 
C)  falls; decreases 
D)  rises; decreases 
A)  rises; increases 
B)  falls; increases 
C)  falls; decreases 
D)  rises; decreases B

Question 2

The economy of Dream Island, which is isolated from the rest of the world, has the supply of loanable funds schedule and the demand for loanable funds schedule shown in the table above. As it happens, all of the supply of loanable funds are from householdsʹ saving and the entre demand for loanable funds is from firmsʹ investment demand.
a) Draw the demand and supply curves.
b) What is the equilibrium real interest rate?
c) What is equilibrium investment? Equilibrium saving?
d) Describe the situation in Dream Islandʹs loanable funds market when the real interest rate is 10 percent. Is there a shortage of loanable funds? A surplus of loanable funds?
e) Describe the situation in Dream Islandʹs capital market when the real interest rate is 6 percent. Is there a shortage of loanable funds? A surplus of loanable funds?

Accepted Answer

a) See the figure above.
b) The equilibrium real interest rate is the interest rate at which the quantity of loanable funds demanded which is the quantity of investment demanded) equals the quantity of loanable funds supplied which is the quantity of saving supplied). As the figure shows, in the economy of Dream Island, the equilibrium real interest rate is 8 percent.
c) The equilibrium amount of investment equals 3,500 dollars. The equilibrium amount of saving is the same, $3,500.
d) When the real interest rate is 10 percent, the quantity of loanable funds suppliedwhich is the quantity of saving supplied), $4,500, exceeds the quantity of loanable funds demanded which is the quantity of investment demanded),
$2,500. So there a surplus of loanable funds. Borrowers have an easy time finding the loans they want, but lenders are unable to lend all the funds they have available. As a result, the real interest rate falls until the quantity of loanable funds supplied equals the quantity of loanable funds demanded.
e) When the real interest rate is 6 percent, the quantity of loanable funds supplied which is the quantity of saving supplied) $2,500, is less than the quantity of loanable funds demanded which is the quantity of investment demanded), $4,500. There is a shortage of loanable funds. Borrowers canʹt find the loans they want, but lenders are able to lend all the funds they have available. As a result, the real interest rate rises until the quantity of loanable funds supplied equals the quantity of loanable funds demanded.

Question 3

Which of the following is true regarding the effect expected future income has on saving?
I. As expected future income increases, saving increases.
II. Young people typically save very little.
III. Middle aged people, earning higher incomes, are not very big savers.

Accepted Answer

A)  II and III 
B)  I and III 
C)  III only 
D)  II only 
A)  II and III 
B)  I and III 
C)  III only 
D)  II only D

Question 4

If the nominal interest rate is 7 percent and the inflation rate is 1 percent, the real interest rate is approximately

Accepted Answer

A)  8 percent. 
B)  6 percent. 
C)  -6 percent. 
D)  7 percent. 
A)  8 percent. 
B)  6 percent. 
C)  -6 percent. 
D)  7 percent.

Question 5

Suppose the real interest rate rises and the quantity of loanable funds increases. These changes could have been the result of

Accepted Answer

A)  firms expecting lower future profits. 
B)  firms expecting higher future profits. 
C)  in increase in the default risk. 
D)  households expecting higher future income. 
A)  firms expecting lower future profits. 
B)  firms expecting higher future profits. 
C)  in increase in the default risk. 
D)  households expecting higher future income.

Question 6

The real interest rate

Accepted Answer

A)  is approximately equal to the nominal interest rate plus the inflation rate. 
B)  is positively related to the inflation rate. 
C)  is approximately equal to the nominal interest rate minus the inflation rate. 
D)  can never be negative. 
A)  is approximately equal to the nominal interest rate plus the inflation rate. 
B)  is positively related to the inflation rate. 
C)  is approximately equal to the nominal interest rate minus the inflation rate. 
D)  can never be negative.

Question 7

increases householdsʹ saving.

Accepted Answer

A)  A tax cut that increases disposable income 
B)  A decrease in the real interest rate 
C)  Higher expected future income 
D)  A stock market boom that increases the purchasing power of householdsʹ wealth 
A)  A tax cut that increases disposable income 
B)  A decrease in the real interest rate 
C)  Higher expected future income 
D)  A stock market boom that increases the purchasing power of householdsʹ wealth

Question 8

A decrease in the real interest rate leads to a the demand for loanable funds curve, and a decrease in the expected profit leads to a the demand for loanable funds curve.

Accepted Answer

A)  movement down along; movement up along 
B)  rightward shift in; leftward shift in 
C)  movement down along; leftward shift in 
D)  rightward shift in; movement up along 
A)  movement down along; movement up along 
B)  rightward shift in; leftward shift in 
C)  movement down along; leftward shift in 
D)  rightward shift in; movement up along

Question 9

-In the above figure, an increase in the expected profit will result in a movement from point E to

Accepted Answer

A)  point F. 
B)  point I. 
C)  point H. 
D)  point G. 
A)  point F. 
B)  point I. 
C)  point H. 
D)  point G.

Question 10

How does the real interest affect householdsʹ decisions about saving?

Accepted Answer

All disposable income is either used for

Question 11

Households will choose to save more if

Accepted Answer

A)  current disposable income increases. 
B)  income is expected to decrease in the future. 
C)  Both answers A and B are correct. 
D)  Neither answer A nor B is correct. 
A)  current disposable income increases. 
B)  income is expected to decrease in the future. 
C)  Both answers A and B are correct. 
D)  Neither answer A nor B is correct.

Question 12

At the beginning of the year, Tomʹs Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tomʹs gross investment for the year totaled

Accepted Answer

A)  6 machines. 
B)  2 machines. 
C)  1 machine. 
D)  3 machines. 
A)  6 machines. 
B)  2 machines. 
C)  1 machine. 
D)  3 machines.

Question 13

Which of the following will shift the supply of loanable funds curve leftward?

Accepted Answer

A)  a decrease in disposable income 
B)  a decrease in expected future income 
C)  a decrease in real wealth 
D)  a decrease in the real interest rate 
A)  a decrease in disposable income 
B)  a decrease in expected future income 
C)  a decrease in real wealth 
D)  a decrease in the real interest rate

Question 14

-In the above figure, if the real interest rate is 6 percent, the quantity of loanable funds demanded is

Accepted Answer

A)  $450 billion. 
B)  $150 billion. 
C)  $600 billion. 
D)  $300 billion. 
A)  $450 billion. 
B)  $150 billion. 
C)  $600 billion. 
D)  $300 billion.

Question 15

If disposable income increases, people will decide to saving, the supply of loanable funds will and the real interest rate will .

Accepted Answer

A)  increase; increase; fall. 
B)  decrease; decrease; rise. 
C)  decrease; increase; fall. 
D)  increase; decrease; rise. 
A)  increase; increase; fall. 
B)  decrease; decrease; rise. 
C)  decrease; increase; fall. 
D)  increase; decrease; rise.

Question 16

What is the relationship between the real interest rate, the supply of loanable funds and the demand for loanable funds?

Accepted Answer

The supply of loanable funds has a posit

Question 17

Which of the following items are considered physical capital?
i. shares of Ford stock traded on the New York Stock Exchange
ii. the Taco Bell store nearest you
iii. the rental cars owned by Hertz Rental-A-Car
iv. the salaries paid to Intel executives

Accepted Answer

A)  ii and iii. 
B)  i, ii and iv. 
C)  i, ii and iii. 
D)  i and iv. 
A)  ii and iii. 
B)  i, ii and iv. 
C)  i, ii and iii. 
D)  i and iv.

Question 18

The expected profit from an investment will change with

Accepted Answer

A)  a change in technology. 
B)  a change in the real interest rate. 
C)  Both A and B are correct. 
D)  Neither A nor B is correct. 
A)  a change in technology. 
B)  a change in the real interest rate. 
C)  Both A and B are correct. 
D)  Neither A nor B is correct.

Question 19

The increase in the capital stock equals the amount of

Accepted Answer

A)  private sector spending. 
B)  gross investment. 
C)  depreciation. 
D)  net investment. 
A)  private sector spending. 
B)  gross investment. 
C)  depreciation. 
D)  net investment.

Question 20

The nominal interest rate minus the real interest rate approximately equals the

Accepted Answer

A)  rate of increase in the amount of investment. 
B)  the rate of increase in the income. 
C)  inflation rate. 
D)  the rate the bank receives to cover lending costs. 
A)  rate of increase in the amount of investment. 
B)  the rate of increase in the income. 
C)  inflation rate. 
D)  the rate the bank receives to cover lending costs.

Suppose the market for loanable funds is in equilibrium. If disposable income increases, the equilibrium real interest rate and the quantity of loanable funds .

Which of the following is true regarding the effect expected future income has on saving? I. As expected future income increases, saving increases. II. Young people typically save very little. III. Middle aged people, earning higher incomes, are not very big savers.

If the nominal interest rate is 7 percent and the inflation rate is 1 percent, the real interest rate is approximately

Suppose the real interest rate rises and the quantity of loanable funds increases. These changes could have been the result of

The real interest rate

increases householdsʹ saving.

A decrease in the real interest rate leads to a the demand for loanable funds curve, and a decrease in the expected profit leads to a the demand for loanable funds curve.

-In the above figure, an increase in the expected profit will result in a movement from point E to

How does the real interest affect householdsʹ decisions about saving?

Households will choose to save more if

At the beginning of the year, Tomʹs Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tomʹs gross investment for the year totaled

Which of the following will shift the supply of loanable funds curve leftward?

-In the above figure, if the real interest rate is 6 percent, the quantity of loanable funds demanded is

If disposable income increases, people will decide to saving, the supply of loanable funds will and the real interest rate will .

What is the relationship between the real interest rate, the supply of loanable funds and the demand for loanable funds?

Which of the following items are considered physical capital? i. shares of Ford stock traded on the New York Stock Exchange ii. the Taco Bell store nearest you iii. the rental cars owned by Hertz Rental-A-Car iv. the salaries paid to Intel executives

The expected profit from an investment will change with

The increase in the capital stock equals the amount of

The nominal interest rate minus the real interest rate approximately equals the

What Is Economics

The Economic Problem

Demand and Supply

Measuring Gdp and Economic Growth

Monitoring Jobs and Inflation

Economic Growth

Money, the Price Level, and Inflation

The Exchange Rate and the Balance of Payments

Aggregate Supply and Aggregate Demand

Expenditure Multipliers: the Keynesian Model

U.S Inflation, Unemployment, and Business Cycle

Fiscal Policy

Monetary Policy

International Trade Policy

Review

Filters

Exam 7: Finance, Saving, and Investment

Suppose the market for loanable funds is in equilibrium. If disposable income increases, the equilibrium real interest rate and the quantity of loanable funds .

Which of the following is true regarding the effect expected future income has on saving? I. As expected future income increases, saving increases. II. Young people typically save very little. III. Middle aged people, earning higher incomes, are not very big savers.

If the nominal interest rate is 7 percent and the inflation rate is 1 percent, the real interest rate is approximately

Suppose the real interest rate rises and the quantity of loanable funds increases. These changes could have been the result of

The real interest rate

increases householdsʹ saving.

A decrease in the real interest rate leads to a the demand for loanable funds curve, and a decrease in the expected profit leads to a the demand for loanable funds curve.

-In the above figure, an increase in the expected profit will result in a movement from point E to

How does the real interest affect householdsʹ decisions about saving?

Households will choose to save more if

At the beginning of the year, Tomʹs Tubes had a capital stock of 5 tube inflating machines. During the year, Tom scrapped 2 old machines and purchased 3 new machines. Tomʹs gross investment for the year totaled

Which of the following will shift the supply of loanable funds curve leftward?

-In the above figure, if the real interest rate is 6 percent, the quantity of loanable funds demanded is

If disposable income increases, people will decide to saving, the supply of loanable funds will and the real interest rate will .

What is the relationship between the real interest rate, the supply of loanable funds and the demand for loanable funds?

Which of the following items are considered physical capital? i. shares of Ford stock traded on the New York Stock Exchange ii. the Taco Bell store nearest you iii. the rental cars owned by Hertz Rental-A-Car iv. the salaries paid to Intel executives

The expected profit from an investment will change with

The increase in the capital stock equals the amount of

The nominal interest rate minus the real interest rate approximately equals the

What Is Economics

The Economic Problem

Demand and Supply

Measuring Gdp and Economic Growth

Monitoring Jobs and Inflation

Economic Growth

Money, the Price Level, and Inflation

The Exchange Rate and the Balance of Payments

Aggregate Supply and Aggregate Demand

Expenditure Multipliers: the Keynesian Model

U.S Inflation, Unemployment, and Business Cycle

Fiscal Policy

Monetary Policy

International Trade Policy

Review

Filters