Deck 10: Credit Markets

Question 1

A debtor's quantity of credit demanded and the rate of interest are likely to be ________.

A) unrelated
B) positively correlated
C) negatively correlated
D) positively related if the rate of interest is below 10 percent and negatively related if it is above 10 percent.

Answer 1

negatively correlated

Question 2

The total interest that a borrower has to pay on a loan is equal to ________.

A) principal plus the rate of interest
B) principal minus the rate of interest
C) principal times the rate of interest
D) principal divided by the rate of interest

Answer 2

principal times the rate of interest

Question 3

An individual can borrow a certain sum of money from any of the three banks in her town-Bank 1,Bank 2,and Bank 3.Bank 1 offers her loans at an annual interest rate of 5 percent,Bank 2 offers her loans at an annual interest rate of 3 percent,and Bank 3 offers her a loan at an annual interest rate of 10 percent.A rational individual will ________.

A) borrow from Bank 1
B) borrow from Bank 2
C) borrow from Bank 3
D) be indifferent about borrowing from any of the three banks

Answer 3

borrow from Bank 2

Question 4

If the nominal interest rate in an economy is 4 percent and the real interest rate in the economy is 2 percent,the rate of inflation in the economy must be ________.

A) 2 percent
B) 4 percent
C) −2 percent
D) 0.5 percent

Question 5

If an individual borrows $200 at an annual rate of interest of 10 percent,what is the total amount that she will have to repay after 1 year?

A) $20
B) $200
C) $210
D) $220

Question 6

Which of the following statements is true?

A) Money that is lent out is considered to be a liability.
B) People who lend money are known as debtors.
C) People who borrow money are known as creditors.
D) Non-bank institutions are also a part of the credit market.

Question 7

The additional payment a borrower has to make on a loan is referred to as ________.

A) credit
B) stock
C) interest
D) principal

Question 8

The annual price of a $1 loan is referred to as ________.

A) principal
B) service tax
C) the rate of interest
D) the discount value

Question 9

If an individual borrows $100 at an annual rate of interest of 5 percent,how much interest will he have to pay at the end of 1 year?

A) $5
B) $10
C) $20
D) $50

Question 10

If the nominal interest rate is greater than the real interest rate in an economy,________.

A) the inflation rate must be positive in the economy
B) the inflation rate must be negative in the economy
C) the inflation rate must be zero in the economy
D) the real interest rate in the economy must be negative

Question 11

If the nominal interest rate in an economy is 6 percent and the rate of inflation in the economy is 4 percent,the real interest rate in the economy is ________.

A) 2 percent
B) 24 percent
C) 1.5 percent
D) 10 percent

Question 12

Economic agents who borrow funds are known as ________.

A) creditors
B) debtors
C) receivers
D) investors

Question 13

Consider two economies: A and B.The nominal interest rate is the same in both economies,but the rate of inflation is higher in economy B.Which of the following statements will then be true?

A) The real interest rate will be higher in economy A.
B) The real interest rate will be higher in economy B.
C) The real interest rate will be the same in both economies.
D) The number of borrowers in both economies will depend on whether the real interest rate is higher in economy A or economy B.

Question 14

Credit is ________.

A) the loan that a debtor receives
B) the income that an employee earns
C) the value of the assets inherited by individuals from their parents
D) the annual cost of maintaining an asset

Question 15

The real interest rate is equal to ________.

A) the nominal interest rate adjusted for tax rates
B) the nominal interest rate adjusted for inflation
C) the nominal interest rate adjusted for income changes
D) the nominal interest rate adjusted for changes in exchange rate

Question 16

Assuming all else equal,a rise in the rate of interest ________.

A) results in a fall in the cost of borrowing
B) results in a fall in the quantity of credit demanded
C) results in an increase in the number of potential debtors
D) results in a fall in the amount of interest accumulated on a loan

Question 17

Which of the following equations is correct?

A) Real interest rate = Nominal interest rate + Inflation rate
B) Real interest rate = Nominal interest rate − Inflation rate
C) Real interest rate = Nominal interest rate × Inflation rate
D) Real interest rate = Nominal interest rate ÷ Inflation rate

Question 18

Which of the following statements is true?

A) Banks are the only financial institutions that lend money and do not accept deposits.
B) Banks are the only financial institutions that do not lend money but accept deposits.
C) The interest rate is positively related to the quantity of credit demanded.
D) The larger the principal invested, the higher will be the interest received at the end of a year.

Question 19

If an individual borrows $100 and pays back $100 after a year to settle his loan,it implies that the rate of interest is ________.

A) 0 percent
B) 1 percent
C) 10 percent
D) 100 percent

Question 20

What is meant by the term "rate of interest"? If the nominal rate of interest in an economy is 6 percent and the rate of inflation in the economy is 4 percent,what is the real rate of interest in the economy?

Question 21

The credit demand curve is ________.

A) vertical
B) horizontal
C) upward-sloping
D) downward-sloping

Question 22

An optimizing economic agent will use the ________ rate when calculating the economic cost of a loan.

A) tax
B) exchange
C) real interest
D) nominal interest

Question 23

Assuming all else equal,if there is an increase in the real interest rate,________.

A) the credit demand curve will shift to the left
B) the credit demand curve will shift to the right
C) there will be an upward movement along the credit demand curve
D) there will be a downward movement along the credit demand curve

Question 24

Which of the following is likely to shift the credit demand curve of a computer manufacturer to the left,assuming all else equal?

A) An increase in the real interest rate
B) A decrease in the real interest rate
C) A decrease in the scale of production
D) An increase in the scale of production

Question 25

If the annual inflation rate in an economy is i,then $1 borrowed at the beginning of a year will have the same purchasing power as ________ dollars at the end of the year.

A) i
B) (1/i)
C) (1 − i)
D) (1 + i)

Question 26

What does the slope of the credit demand curve imply? When do movements along a credit demand curve occur?

Question 27

Everything else remaining unchanged,what is likely to happen to the credit demand curve of an economy if:
a)businesses in the economy see scope for growth and are planning to expand production in the future?
b)households are pessimistic about future incomes?
c)the government is planning to borrow money from financial institutions for investment in infrastructures?

Question 28

John is expecting to get a hike in his salary after 3 months.Assuming all else equal,this is likely to cause a(n)________ his current credit demand curve.

A) downward movement along
B) upward movement along
C) left shift of
D) right shift of

Question 29

Assuming all else equal,if households are optimistic about their future income,it is likely to cause a(n)________.

A) downward movement along their credit demand curve
B) upward movement along their credit demand curve
C) right shift of their credit demand curve
D) left shift of their credit demand curve

Question 30

If the annual inflation rate in an economy is positive,the purchasing power of a dollar kept in a bank ________.

A) will increase over time
B) will decrease over time
C) will remain the same over time
D) will increase or decrease, depending on the economic growth rate

Question 31

Assuming all else equal,if the real interest rate increases,it will lead to ________.

A) a decrease in the quantity of credit demanded by a firm
B) an increase in the quantity of credit demanded by a firm
C) a right shift of the credit demand curve of a firm
D) a left shift of the credit demand curve of a firm

Question 32

When the credit demand curve is relatively steep,the quantity of credit demanded is ________.

A) relatively sensitive to changes in the tax rates
B) relatively sensitive to changes in the real interest rate
C) not very sensitive to changes in the tax rates
D) not very sensitive to changes in the real interest rate

Question 33

If the real interest rate is equal to the nominal interest rate in an economy,________.

A) the inflation rate must be zero in the economy
B) the inflation rate must be positive in the economy
C) the inflation rate must be negative in the economy
D) the nominal interest rate must be zero in the economy

Question 34

Which of the following is likely to shift the credit demand curve of an automobile manufacturer to the right,assuming all else equal?

A) A decrease in the real interest rate
B) An increase in the real interest rate
C) A plan to increase production and expand to newer markets
D) A plan to decrease production and exit from existing markets

Question 35

Assuming all else equal,if an airline company decides to purchase new planes,it is likely to cause ________.

A) a downward movement along its credit demand curve
B) an upward movement along its credit demand curve
C) its credit demand curve to shift to the right
D) its credit demand curve to shift to the left

Question 36

The credit demand curve is the schedule that reports the relationship between the quantity of credit demanded and ________ in an economy,assuming all else equal.

A) the average tax rate
B) the annual inflation rate
C) the real rate of interest
D) the nominal rate of interest

Question 37

Everything else remaining unchanged,what is likely to happen to the credit demand curve of a software producing firm if:
a)there is an increase in the real interest rate?
b)it plans to expand production in near future?

Question 38

Assuming all else equal,a decrease in the real interest rate will cause ________.

A) the credit demand curve to shift to the right
B) the credit demand curve to shift to the left
C) a downward movement along the credit demand curve
D) an upward movement along the credit demand curve

Question 39

If the nominal interest rate increases without any change in the rate of inflation in an economy,________.

A) the real interest rate in the economy decreases
B) the real interest rate in the economy increases
C) the real interest rate in the economy remains the same
D) the ratio of real interest rate to nominal interest rate increases

Question 40

An individual plans to borrow a sum of $10,000 for 1 year.The nominal interest charged on the borrowed sum is 6 percent.
a)If he takes the loan,what will be the interest amount and the total amount that he would have to pay at the end of the year?
b)If the rate of inflation in the economy is 10 percent,then is it a good idea for him to take the loan? Why or why not?

Question 41

What does the slope of the credit supply curve imply? When do movements along a credit supply curve occur?

Question 42

Assuming all else equal,if a firm decides to pay more dividends and lowers the amount of retained earnings it holds,it will cause ________.

A) the current credit supply curve of the firm to shift to the left
B) the current credit supply curve of the firm to shift to the right
C) an upward movement along the current credit supply curve of the firm
D) a downward movement along the current credit supply curve of the firm

Question 43

Assuming all else equal,the credit supply curve shows the relationship between the quantity of credit supplied and the ________.

A) inflation rate
B) real wage rate
C) income tax rate
D) real interest rate

Question 44

John makes it a point to save a portion of his salary every month.Assuming all else equal,if the real interest rate increases,it is likely to cause ________.

A) an upward movement along John's credit supply curve
B) a downward movement along John's credit supply curve
C) John's credit supply curve to shift to the left
D) John's credit supply curve to shift to the right

Question 45

The credit supply curve is ________.

A) vertical
B) horizontal
C) upward-sloping
D) downward-sloping

Question 46

Assuming all else equal,if a household is pessimistic about future income,it is likely to cause a(n)________ the current credit supply curve of the household.

A) downward movement along
B) upward movement along
C) right shift of
D) left shift of

Question 47

Assuming all else equal,an increase in the real interest rate will cause ________.

A) a leftward shift of the credit supply curve
B) a rightward shift of the credit supply curve
C) an upward movement along the credit supply curve
D) a downward movement along the credit supply curve

Question 48

Everything else remaining unchanged,what is likely to happen to the credit supply curve of an economy if firms tend to hold on to retained earnings instead of paying dividends?

Question 49

The market where borrowers obtain funds from savers is referred to as the ________.

A) spot market
B) credit market
C) capital market
D) exchange market

Question 50

The loanable funds market is also referred to as the ________.

A) spot market
B) credit market
C) capital market
D) exchange market

Question 51

List four reasons people save.

Question 52

The opportunity cost of current consumption is ________.

A) the inflation rate
B) the real wage rate
C) the real interest rate
D) the nominal wage rate

Question 53

All else being equal,an increase in government borrowing is likely to cause a(n)________.

A) left shift of the credit demand curve
B) right shift of the credit demand curve
C) upward movement along the credit demand curve
D) downward movement along the credit demand curve

Question 54

Money or goods that parents leave to their children in their wills are referred to as ________.

A) charity
B) bequests
C) interest
D) transfers

Question 55

Which of the following statements is true?

A) If the opportunity cost of current consumption is high, people will save more.
B) If the opportunity cost of current consumption is high, people will save less.
C) If the opportunity cost of current consumption is high, the inflation rate will increase.
D) If the opportunity cost of current consumption is high, the unemployment rate will decrease.

Question 56

Savers are willing to lend out money because ________.

A) of altruism
B) the rate of inflation in an economy is normally positive
C) the rate of inflation in an economy is normally negative
D) they prefer to spend money in the future rather than today

Question 57

Everything else remaining unchanged,what is likely to happen to the credit supply curve of households if:
a)there is a decrease in the real interest rate?
b)households expect a recession in near future?

Question 58

Assuming all else equal,any change that causes an increase in the credit supply at a given real interest rate will cause ________.

A) the credit supply curve to shift to the left
B) the credit supply curve to shift to the right
C) an upward movement along the credit supply curve
D) a downward movement along the credit supply curve

Question 59

Which of the following statements is true?

A) If the real interest rate increases, the opportunity cost of current consumption increases.
B) If the nominal wage rate increases, the opportunity cost of current consumption decreases.
C) If the real wage rate increases, the opportunity cost of current consumption decreases.
D) If the unemployment rate increases, the opportunity cost of current consumption decreases.

Question 60

Which of the following statements is true?

A) An increase in the real interest rate might discourage savings.
B) An increase in the real interest rate always encourages higher savings.
C) In an economy with a positive inflation rate, the real wage rate is always greater than the nominal wage rate.
D) An increase in the nominal wage rate leads to a decrease in the real wage rate if the price level is stable.

Question 61

Which of the following statements is true?

A) An excess supply of credit exerts an upward pressure on the real rate of interest.
B) An excess demand for credit exerts an upward pressure on the real rate of interest.
C) At rates of interest below the equilibrium rate, there is an excess supply of credit.
D) At rates of interest above the equilibrium rate, there is an excess demand for credit.

Question 62

The following figure shows credit demand and credit supply curves.

Refer to the figure above.Assume that at point A the real interest rate is 8 percent,the inflation rate is 3 percent,and the total quantity of credit in the market at equilibrium (Q*)is equal to $100 million.Which of the following could be true about point B?

A) The rate of inflation is 2 percent, and the real interest rate is 6 percent.
B) The nominal interest rate is 5 percent, and the inflation rate is 6 percent.
C) The real interest rate is 8 percent, and the rate of inflation is 4 percent.
D) The nominal interest rate is 11 percent, and the inflation rate is 3 percent.

Question 63

At the equilibrium rate of interest,________.

A) the quantity of credit demanded is zero
B) the quantity of credit supplied is zero
C) the quantity of credit demanded equals the quantity of credit supplied
D) the quantity of credit demanded falls short of the quantity of credit supplied

Question 64

Illustrate graphically how the equilibrium quantity of credit and real rate of interest will change from an initial equilibrium if:
a)credit demand decreases at the initial equilibrium rate of interest.
b)credit supply increases at the initial equilibrium rate of interest.

Question 65

What is the loanable funds market? What happens if the real interest rate in the market is held above the equilibrium interest rate?

Question 66

The following figure shows two credit demand curves, CD₁ and CD₂, and two credit supply curves, CS₁ and CS₂.

Refer to the figure above.What is the equilibrium quantity of credit when the credit demand curve is CD₁ and the credit supply curve is CS₁?

A) $20
B) $30
C) $40
D) $50

Question 67

Everything else remaining unchanged,what is likely to happen to the equilibrium real interest rate and quantity of credit if the credit demand curve shifts to the right?

A) Both the equilibrium rate of interest and quantity of credit will increase.
B) Both the equilibrium rate of interest and quantity of credit will decrease.
C) The equilibrium rate of interest will increase, and the equilibrium quantity of credit will decrease.
D) The equilibrium rate of interest will decrease, and the equilibrium quantity of credit will increase.

Question 68

If the real interest rate is lower than the equilibrium real interest rate,________.

A) interest rates tend to fall further
B) the quantity of credit demanded equals the quantity of credit supplied
C) the quantity of credit demanded falls short of the quantity of credit supplied
D) the quantity of credit supplied falls short of the quantity of credit demanded

Question 69

The following figure shows two credit demand curves, CD₁ and CD₂, and two credit supply curves, CS₁ and CS₂.

Refer to the figure above.Which of the following statements is true when the credit demand curve is CD₂ and the credit supply curve is CS₁?

A) At all rates of interest below 5 percent, there will be an excess demand for credit.
B) At all rates of interest below 6 percent, there will be an excess demand for credit.
C) At all rates of interest below 7 percent, there will be an excess demand for credit.
D) At all rates of interest below 8 percent, there will be an excess demand for credit.

Question 70

Everything else remaining unchanged,what is likely to happen to the equilibrium real interest rate and quantity of credit if the credit demand curve shifts to the left?

A) Both the equilibrium rate of interest and quantity of credit will increase.
B) Both the equilibrium rate of interest and quantity of credit will decrease.
C) The equilibrium rate of interest will increase, and the equilibrium quantity of credit will decrease.
D) The equilibrium rate of interest will decrease, and the equilibrium quantity of credit will increase.

Question 71

The following figure shows two credit demand curves, CD₁ and CD₂, and two credit supply curves, CS₁ and CS₂.

Refer to the figure above.What is the equilibrium rate of interest when the credit demand curve is CD₁ and the credit supply curve is CS₁?

A) 2 percent
B) 3 percent
C) 4 percent
D) 5 percent

Question 72

The following figure shows two credit demand curves, CD₁ and CD₂, and two credit supply curves, CS₁ and CS₂.

Refer to the figure above.What is the equilibrium quantity of credit when the credit demand curve is CD₂ and the credit supply curve is CS₁?

A) $20
B) $30
C) $40
D) $50

Question 73

If the quantity of credit demanded in a market exceeds the quantity of credit supplied in the market,________.

A) the real rate of interest tends to fall
B) the real rate of interest tends to rise
C) the rate of inflation tends to rise
D) the unemployment rate tends to fall

Question 74

The following figure shows two credit demand curves, CD₁ and CD₂, and two credit supply curves, CS₁ and CS₂.

Refer to the figure above.Which of the following statements is true when the credit demand curve is CD₁ and the credit supply curve is CS₁?

A) At all rates of interest above 1 percent, there will be an excess supply of credit.
B) At all rates of interest above 2 percent, there will be an excess supply of credit.
C) At all rates of interest above 3 percent, there will be an excess supply of credit.
D) At all rates of interest above 4 percent, there will be an excess supply of credit.

Question 75

The following figure shows credit demand and credit supply curves.

Refer to the figure above.Assume that the loanable funds market initially is in equilibrium at point B.If substantial tax credits are promised to firms that invest in domestic facilities,how will the equilibrium change?

A) Will shift to point C
B) Will shift to point A
C) Will shift to point D
D) Will remain at point B

Question 76

The following figure shows credit demand and credit supply curves.

Refer to the figure above.Assume that the loanable funds market initially is in equilibrium at point C.How is the equilibrium likely going to change if college tuition becomes free for all students?

A) Shifts to point B
B) Shifts to point A
C) Shifts to point D
D) Remains at point C

Question 77

Everything else remaining unchanged,what is likely to happen to the equilibrium real interest rate and the equilibrium quantity of credit if the credit supply curve shifts to the left?

A) Both the equilibrium rate of interest and quantity of credit will increase.
B) Both the equilibrium rate of interest and quantity of credit will decrease.
C) The equilibrium rate of interest will increase, and the equilibrium quantity of credit will decrease.
D) The equilibrium rate of interest will decrease, and the equilibrium quantity of credit will increase.

Question 78

The following figure shows two credit demand curves, CD₁ and CD₂, and two credit supply curves, CS₁ and CS₂.

Refer to the figure above.What is the equilibrium rate of interest when the credit demand curve is CD₂ and the credit supply curve is CS₁?

A) 2 percent
B) 3 percent
C) 4 percent
D) 5 percent

Question 79

If the real interest rate is greater than the equilibrium real interest rate,________.

A) interest rates tend to rise further
B) the quantity of credit demanded equals the quantity of credit supplied
C) the quantity of credit demanded falls short of the quantity of credit supplied
D) the quantity of credit supplied falls short of the quantity of credit demanded

Question 80

The following figure shows two credit demand curves, CD₁ and CD₂, and two credit supply curves, CS₁ and CS₂.

Refer to the figure above.Which of the following statements is true when the credit demand curve is CD₁ and the credit supply curve is CS₁?

A) At all rates of interest above 1 percent, there will be a tendency for real interest rates to fall.
B) At all rates of interest above 2 percent, there will be a tendency for real interest rates to fall.
C) At all rates of interest above 3 percent, there will be a tendency for real interest rates to fall.
D) At all rates of interest above 4 percent, there will be a tendency for real interest rates to fall.