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

Question 1

The government

A) sets most interest rates.
B) is a net lender or supplier of loanable funds).
C) is a net borrower or demander of loanable funds).
D) determines the "federal risk premium" portion of commercial interest rates.
E) earns more interest on treasury securities when interest rates rise.

Answer 1

C

Question 2

Borrowers in the loanable funds market consist of

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.

Answer 2

A

Question 3

Refer to the following graph to answer the next questions:


-In the figure, line 1 represents_____ , line 2 represents_____ , and 5 percent represents ______.

A) savings; the supply of loanable funds; a surplus of loanable funds
B) savings; the demand for loanable funds; the equilibrium interest rate
C) investment; the supply of loanable funds; a shortage of loanable funds
D) investment; the demand for loanable funds; the equilibrium interest rate
E) foreign savings; the supply of loanable funds; a surplus of loanable funds

Answer 3

savings; the demand for loanable funds; the equilibrium interest rate

Question 4

The timeline of production indicates that

A) supply creates its own investment.
B) first production occurs, then profit represents a residual, and then this residual is saved.
C) firms first invest which is borrowing), then they produce, and then the revenue they receive is used to pay resource suppliers and lenders.
D) firms first save which is lending), then they produce, and then the revenue they receive is used to lend even more.
E) real interest rates rise faster than nominal interest rates because production occurs before income is received by the firm.

Question 5

The concept of the loanable funds market is

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 6

Refer to the following graph to answer the next questions:

In the figure, at an interest rate of 4 percent, the

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 shortage of loanable funds.

Question 7

The correct production timeline is

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 8

Refer to the following graph to answer the next questions:

In the figure, at an interest rate of 6 percent, the

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 9

Refer to the following graph to answer the next questions:

In the figure, at an interest rate of 5 percent, the

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 10

The supply of loanable funds comes from

A) households and is downward sloping.
B) firms and is upward sloping.
C) households and is upward sloping.
D) the government and is upward sloping.
E) either foreign entities or firms and is upward sloping.

Question 11

The interest rate is

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 12

Every dollar borrowed

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 13

The demand for loanable funds is

A) savings, because households borrow more than firms.
B) horizontal, because firms are infinitely sensitive to interest rates.
C) vertical, because it is nonresponsive to interest rates.
D) upward sloping, because at higher interest rates the opportunity cost of holding money increases.
E) investment, because firms are on the aggregate) net borrowers.

Question 14

Lenders in the loanable funds market consist of

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

Question 15

Typically, savers in the loanable funds market are________ , and borrowers are______ .

A) the government and households; foreign entities and firms
B) the government and foreign entities; households and firms
C) foreign firms and households; foreign banks and domestic firms
D) households and foreign entities; firms and the U.S.) government
E) large firms and households; small firms and microcapital organizations

Question 16

Savings is the

A) demand for loanable funds and is downward sloping.
B) supply of loanable funds and is horizontal.
C) supply of loanable funds and is vertical.
D) supply of loanable funds and is upward sloping.
E) demand for loanable funds and is upward sloping.

Question 17

Savings represents

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 18

Foreign entities

A) are generally borrowers of domestic U.S.) loanable funds.
B) are generally lenders in the domestic U.S.) loanable funds.
C) typically require a greater inflation premium than domestic borrowers.
D) typically require a smaller inflation premium than domestic borrowers.
E) are not concerned about the U.S. interest rate compared to their own, since it is illegal for them to lend in the United States.

Question 19

Refer to the following graph to answer the next questions:


-In the figure, line 2 represents the______ , and at an interest rate of 6 percent a______ of loanable funds exists.

A) supply of loanable funds; shortage
B) quantity demanded of loanable funds; surplus
C) demand for loanable funds; shortage
D) quantity supplied of loanable funds; surplus
E) demand of loanable funds; surplus

Question 20

The notion of the loanable funds market is the method by which

A) consumers get payday loans and auto-title loans.
B) savers typically households and individuals) supply funds to borrowers typically firms).
C) savers typically firms) supply funds to borrowers typically the government).
D) borrowers are exploited by loan sharks.
E) the government lends money to big corporations.

Question 21

Refer to the following graph to answer the next questions:

Assuming the figure represents the market for loanable funds, it would be true that

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 22

An interest rate best represents_______ to borrowers and_________ to savers.

A) cost; return
B) return; cost
C) rate of change; static value
D) static value; rate of change
E) nominal return; real return

Question 23

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

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 24

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

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 25

Since firms are the primary

A) demanders of loanable funds, they must borrow from households.
B) suppliers of loanable funds, they must lend to households.
C) suppliers of loanable funds, they must lend to the government.
D) agents of usury, they must be "reined in" by the people.
E) demanders of loanable funds, they must borrow from the government.

Question 26

A bond is an instrument that allows the bearer to earn interest. The bearer would be best described as

A) a demander of loanable funds.
B) a supplier of loanable funds.
C) a financial intermediary.
D) one who borrows.
E) both a financial intermediary and a borrower.

Question 27

Gross domestic product requires

A) inflation equal to the nominal rate of interest, which means lending equals borrowing.
B) investment, which requires borrowing, which requires a functioning loanable funds market.
C) borrowing, which requires the real rate of interest to be equal to inflation, which requires a functioning loanable funds market.
D) borrowing, which requires sufficiently high interest rates to prevent free riders.
E) investment, which requires borrowing, which requires sufficiently low interest rates to prevent free riders.

Question 28

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 and point D represents 80, then it would be true that

A) both points represent interest rates and there is a surplus of loanable funds at an 80 percent interest rate.
B) both points represent interest rates and there is a shortage of loanable funds at an 80 percent interest rate.
C) both points represent the quantity of loanable funds and there would be a surplus of loanable funds of 40 units.
D) both points represent the quantity of loanable funds and at interest rate A there would be a shortage of loanable funds of 40 units.
E) the quantity of loanable funds supplied exceeds the quantity demanded at interest rate B, if B represents an interest rate.

Question 29

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

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 30

Refer to the following graph to answer the next questions:

Assuming the figure represents the market for loanable funds

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 31

You are an entrepreneur about to start your first business. Based on this statement, you

A) are most likely to be a borrower concerned mostly about the real interest rate you will earn.
B) are most likely to be a lender concerned mostly about the real interest rate you will earn.
C) are most likely to be a borrower concerned mostly about the nominal interest rate you will earn.
D) are most likely to be a lender concerned mostly about the nominal interest rate you will earn.
E) would only be concerned with whether inflation was greater or less than the nominal rate of interest based on the Fisher equation.

Question 32

Which description implies a drop in interest rates?

A) either a leftward shift of the demand curve for loanable funds, or a rightward shift of the supply curve
B) either a leftward shift of the supply curve for loanable funds, or a rightward shift of the demand curve
C) a rightward shift of both the supply and the demand curves for loanable funds
D) a leftward shift of both the supply and the demand curves for loanable funds
E) simultaneous downward movement along fixed demand and supply curves for loanable funds

Question 33

The interest rate is

A) a cost to both savers and borrowers.
B) only a cost to savers.
C) only a return to borrowers.
D) both a cost to savers and a return to borrowers.
E) both a return to savers and a cost to borrowers.

Question 34

Arguably, interest represents

A) both a cost to lenders and a reward to borrowers.
B) both a cost to borrowers and a return to savers.
C) the price of later availability in terms of accrued interest) and a cost to borrowers.
D) the payment to the land factor of production and a return to savers.
E) the optimal rate of investment in depreciating assets and the price of earlier availability.

Question 35

Refer to the following graph to answer the next questions:

Assuming the figure represents the market for loanable funds, it would be true that

A) the vertical axis represents the amount of savings, and the horizontal axis represents the amount of borrowing.
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) the horizontal axis represents the interest rate, and the distance between points C and D represents the shortage of loanable funds.
D) the vertical axis represents the interest rate, and 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 36

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

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

Question 37

The government engages in more deficit spending. Ceteris paribus all else equal), this would cause

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) economic institutions to collapse.

Question 38

Two nations are located next to one another. In Nation A, people are very thrifty and spend much less than their incomes; moreover, Nation A's government runs a balanced budget every year. In Nation B, people spend all of their incomes, but their government runs consistent deficits. Thus,

A) Nation A's extra savings would increase the supply of loanable funds to Nation B.
B) Nation B's government deficit would be a supply of loanable funds to Nation B.
C) Nation A's extra savings would increase the demand for loanable funds in Nation B.
D) Nation B would instantly default on all of its debt obligations.
E) Nation A's extra savings would decrease the supply of loanable funds to Nation B.

Question 39

The interest rate represents to and to .

A) profit; foreign entities; the cost of funds; savers
B) the cost of funds; corporations; a return; governments
C) profit; governments; the marginal rate of arbitrage; foreign entities
D) the cost of borrowing; firms and governments; a reward to saving; households
E) profit; arbitrage companies; loss; firms

Question 40

You deposit $1,000 in the bank and leave it for five years at 3 percent annual interest, making no additional transactions on this account. At the end of the five years, you withdraw the principal and any accumulated interest; the amount you would withdraw would be

A) $1,000.
B) $1,030.
C) $1,150.
D) more than $1,150 but less than $1,500.
E) more than $1,500.

Question 41

The gap between the real and nominal interest rate represents

A) the inflationary premium.
B) the time preference.
C) the difference from what the lender receives and the borrower pays.
D) consumption smoothing.
E) a surplus of loanable funds.

Question 42

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

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.

Question 43

If interest rates rise,

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 44

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

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 45

The real interest rate in 2012 was

A) about 9 percent.
B) about 7 percent.
C) about 5 percent.
D) about 3 percent.
E) a negative number.

Question 46

If interest rates rise,

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 costs 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 47

If interest rates rise but the quantity of loanable funds demanded and supplies remains constant, this implies that

A) both the demand and the supply of loanable funds increased.
B) both the demand and the supply of loanable funds decreased.
C) the demand and the supply of loanable funds both remained the same.
D) the demand for loanable funds decreased while the supply increased.
E) the demand for loanable funds increased while the supply decreased..

Question 48

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 4 percent and stays that way for the duration of your loan. Based on the above information and all else being equal, today

A) you are worse off because inflation has risen.
B) you are better off strictly because 5 percent is still more than 4 percent.
C) you are better off because you are paying back the loan with dollars that represent less purchasing power today than the dollars you borrowed before.
D) the lender is better off because the real rate of interest automatically increases when inflation increases.
E) both you and the lender are better off because real rates fall when inflation rises.

Question 49

If real interest rates fell between 1981 and 2012, then

A) demand for loanable funds shifted right.
B) quantity demanded of loanable funds increased.
C) quantity demanded of loanable funds decreased.
D) quantity supplied of loanable funds increased.
E) supply of loanable funds shifted left.

Question 50

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,

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 51

Assume inflation is occurring in a nation; the implications)

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 52

The Fisher equation relates

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 53

When making decisions about saving and borrowing, people care most about

A) inflation.
B) the real rate of interest.
C) the nominal rate of interest.
D) the rate of saving minus the rate of borrowing.
E) the risk premium portion of the rate of interest.

Question 54

The nominal interest rate is

A) the rate of interest charged to most large commercial borrowers.
B) equal to the real interest rate minus the inflation rate.
C) the rate charged on loans for automobiles and other personal loans but not the rate charged on home loans.
D) the interest rate that is not corrected for inflation.
E) the interest rate that is corrected for inflation.

Question 55

The real interest rate

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 56

Assuming inflation is positive, the real interest rate

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 57

The interest rate represents

A) the opportunity cost of saving.
B) the opportunity cost of consumption.
C) the opportunity cost of saving plus the opportunity cost of inflation.
D) only the opportunity cost of taking a different job.
E) the price of savings but not investment.

Question 58

You are thinking about buying a new car and will borrow $20,000 for this purchase at a 5 percent fixed rate for exactly one year. The lender correctly) assumes that inflation will be 2 percent this year. Based on the above information and assuming you adhere to the terms of the loan, you will pay back the lender exactly_______ , which will represent ______of purchasing power.

A) $20,000; $19,000
B) $21,000; $21,000
C) $21,000; $21,400
D) $21,000; $20,600
E) $19,600; $20,000

Question 59

The largest inflationary gap appeared

A) in the 1960s.
B) in the 1950s during the great U.S. hyperinflation.
C) at the end of the 1970s and in the early 1980s.
D) during the Great Recession of 2007-2009.
E) in the 1990s.

Question 60

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

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 61

If household wealth falls and governments run fewer deficits, we would correctly say that

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 62

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

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 63

Inflation reached its peak of at least 14 percent) in the late 1970s to the early 1980s. If this statement is true, then

A) it is certain the real rate of interest was greater than the nominal rate.
B) it is certain the nominal rate of interest was greater than the real rate.
C) borrowers would borrow more because, automatically, real rates would fall.
D) the real rate of interest must have been constant, even if the nominal rate varied because of consumption smoothing.
E) if higher nominal rates were charged, it would be certain that higher real rates would be received.

Question 64

We could best describe the

A) nominal rate of interest as the inflation-adjusted rate of interest.
B) real rate of interest as the inflation-adjusted rate of interest.
C) rate of inflation as the nominal interest rate.
D) loanable funds market as the market where only governments make loans.
E) supply of loanable funds as upward sloping, with the slope equaling the rate of inflation.

Question 65

By 2015

A) most interest rates were about 5 percent.
B) many interest rates were below 1 percent.
C) almost every interest rate was above 10 percent.
D) federal law required that the interest rate ceiling on all loans be capped at 11.5 percent.
E) the real interest rate was positive, but the nominal interest rate was less than the real rate.

Question 66

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?

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 67

If real rates were higher than nominal rates in 2009, the implication is that

A) inflation was greater than the real rate.
B) inflation was less than the real rate.
C) the nominal rate was equal to the real rate.
D) inflation was negative deflation was occurring).
E) the real rate was equal to the rate of inflation.

Question 68

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 a decrease in time preferences i.e., people are more patient)?

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 69

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?

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 70

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 a general economic collapse in the United States, causing foreigners to become fearful about the U.S. economy?

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

Question 71

Assume deflation is occurring in a nation; the implications)

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 fallen.

Question 72

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 a cut in corporate tax rates, causing business owners and managers to become more optimistic?

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 73

By 1981

A) interest rates were about 5 percent.
B) interest rates were about 7 percent.
C) interest rates were about 15 percent.
D) the real interest rate was negative.
E) the real interest rate was positive, but the nominal interest rate was less than the real rate.

Question 74

As income and wealth rise, we would expect

A) savings to increase as people save some of the extra wealth or income they have.
B) savings to fall, since people would spend the extra income or wealth.
C) interest rates to rise.
D) foreigners with more wealth to move their assets out of the United States to foreign markets.
E) people to have a negative rate of time preference.

Question 75

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

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 76

If foreign entities save more and businesses become more optimistic about the future, we would correctly say that

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 77

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

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 wealth increases.

Question 78

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

A) A baby boom begins, and investor confidence falls.
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) A baby boom begins, and people have higher time preferences.

Question 79

You borrow some amount of money for five years at a fixed rate of 4 percent. For the first three years, inflation is 3 percent, and for the last two years, deflation is 3 percent. Based on this information, your

A) real rate of interest was larger than your nominal rate only for the last two years.
B) real rate of interest was larger than your nominal rate only for the first three years.
C) real rate of interest exceeded your nominal rate for the entire five years.
D) nominal rate of interest exceeded your real rate for the entire five years.
E) nominal rate of interest equaled your real rate for the entire five years.

Question 80

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

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.