Deck 26: 3: Sec 263 Mc the Market for Loanable Funds

Question 1

The slope of the demand for loanable funds curve represents the

A)positive relation between the real interest rate and investment.
B)negative relation between the real interest rate and investment.
C)positive relation between the real interest rate and saving.
D)negative relation between the real interest rate and saving.

Answer 1

A

Question 2

If there is a surplus of loanable funds,then

A)the quantity demanded is greater than the quantity supplied and the interest rate will rise.
B)the quantity demanded is greater than the quantity supplied and the interest rate will fall.
C)the quantity supplied is greater than the quantity demanded and the interest rate will rise.
D)the quantity supplied is greater than the quantity demanded and the interest rate will fall.

Answer 2

B

Question 3

If the demand for loanable funds shifts to the right,then the equilibrium interest rate

A)and quantity of loanable funds rises.
B)and quantity of loanable funds falls.
C)rises and the quantity of loanable funds falls.
D)falls and the quantity of loanable funds rises.

Answer 3

A

Question 4

Other things the same,a higher interest rate induces people to

A)save more,so the supply of loanable funds slopes upward.
B)save less,so the supply of loanable funds slopes downward.
C)invest more,so the supply of loanable funds slopes upward.
D)invest less,so the supply of loanable funds slopes downward.

Question 5

If the demand for loanable funds shifts to the left,then the equilibrium interest rate

A)and quantity of loanable funds rises.
B)and quantity of loanable funds falls.
C)rises and the quantity of loanable funds falls.
D)falls and the quantity of loanable funds rises.

Question 6

The slope of the supply of loanable funds curve represents the

A)positive relation between the real interest rate and investment.
B)positive relation between the real interest rate and saving.
C)negative relation between the real interest rate and investment.
D)negative relation between the real interest rate and saving.

Question 7

Kathleen is considering expanding her dress shop.If interest rates rise she is

A)less likely to expand.This illustrates why the supply of loanable funds slopes downward.
B)more likely to expand.This illustrates why the supply of loanable funds slopes upward.
C)less likely to expand.This illustrates why the demand for loanable funds slopes downward.
D)more likely to expand.This illustrates why the demand for loanable funds slopes upward.

Question 8

Other things the same,when the interest rate rises,

A)people would want to lend more,making the supply of loanable funds increase.
B)people would want to lend less,making the supply of loanable funds decrease.
C)people would want to lend more,making the quantity of loanable funds supplied increase.
D)people would want to lend less,making the quantity of loanable funds supplied decrease.

Question 9

If there is a shortage of loanable funds,then

A)the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium.
B)the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.
C)the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.
D)the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.

Question 10

The source of the supply of loanable funds

A)is saving and the source of demand for loanable funds is investment.
B)is investment and the source of demand for loanable funds is saving.
C)and the demand for loanable funds is saving.
D)and the demand for loanable funds is investment.

Question 11

The supply of loanable funds slopes

A)upward because an increase in the interest rate induces people to save more.
B)downward because an increase in the interest rate induces people to save less.
C)downward because an increase in the interest rate induces people to invest less.
D)upward because an increase in the interest rate induces people to invest more.

Question 12

If there is a surplus of loanable funds,then

A)the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is above equilibrium.
B)the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.
C)the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.
D)the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is below equilibrium.

Question 13

If there is surplus of loanable funds,then

A)the supply for loanable funds shifts right and the demand shifts left.
B)the supply for loanable funds shifts left and the demand shifts right.
C)neither curve shifts,but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium.
D)neither curve shifts,but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.

Question 14

The Eye of Horus incense company has $10 million in cash which it has accumulated from retained earnings.It was planning to use the money to build a new factory.Recently,the rate of interest has increased.The increase in the rate of interest should

A)not influence the decision to build the factory because The Eye of Horus doesn't have to borrow any money.
B)not influence the decision to build the factory because its stockholders are expecting a new factory.
C)make it more likely that The Eye of Horus will build the factory because a higher interest rate will make the factory more valuable.
D)make it less likely that The Eye of Horus will build the factory because the opportunity cost of the $10 million is now higher.

Question 15

If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied,

A)there is a surplus and the interest rate is above the equilibrium level.
B)there is a surplus and the interest rate is below the equilibrium level.
C)there is a shortage and the interest rate is above the equilibrium level.
D)there is a shortage and the interest rate is below the equilibrium level.

Question 16

If there is shortage of loanable funds,then

A)the supply for loanable funds shifts right and the demand shifts left.
B)the supply for loanable funds shifts left and the demand shifts right.
C)neither curve shifts,but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium.
D)neither curve shifts,but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.

Question 17

If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded,

A)there is a surplus and the interest rate is above the equilibrium level.
B)there is a surplus and the interest rate is below the equilibrium level.
C)there is a shortage and the interest rate is above the equilibrium level.
D)there is a shortage and the interest rate is below the equilibrium level.

Question 18

Other things the same,an increase in the interest rate

A)would shift the demand for loanable funds to the right.
B)would shift the demand for loanable funds to the left.
C)would increase the quantity of loanable funds demanded.
D)would decrease the quantity of loanable funds demanded.

Question 19

If the supply for loanable funds shifts to the left,then the equilibrium interest rate

A)and quantity of loanable funds rises.
B)and quantity of loanable funds falls.
C)rises and the quantity of loanable funds falls.
D)falls and the quantity of loanable funds rises.

Question 20

If there is a shortage of loanable funds,then

A)the quantity demanded is greater than the quantity supplied and the interest rate will rise.
B)the quantity demanded is greater than the quantity supplied and the interest rate will fall.
C)the quantity supplied is greater than the quantity demanded and the interest rate will rise.
D)the quantity supplied is greater than the quantity demanded and the interest rate will fall.

Question 21

If Congress increased the tax rate on interest income,investment

A)would increase and saving would decrease.
B)would decrease and saving would increase.
C)and saving would increase.
D)and saving would decrease.

Question 22

The real interest rate is the

A)interest rate corrected for inflation.
B)interest rate as usually reported by banks.
C)difference between the interest rate charged by banks on the loans they make and the interest rate paid by banks to their depositors.
D)difference between the average dividend yield on stocks and the average interest rate on bonds.

Question 23

Suppose the market for loanable funds is in equilibrium.What would happen in the market for loanable funds,other things the same,if the Congress and President increased the maximum contribution limits to 401(k)and 403(b)tax-deferred retirement accounts?

A)the interest rate and quantity of loanable funds would increase
B)the interest rate and quantity of loanable funds would decrease.
C)the interest rate would increase and the quantity of loanable funds would decrease.
D)the interest rate would decrease and the quantity of loanable funds would increase.

Question 24

Which of the following could explain a decrease in the equilibrium interest rate and an increase in the equilibrium quantity of loanable funds?

A)The demand for loanable funds shifted rightward.
B)The demand for loanable funds shifted leftward.
C)The supply of loanable funds shifted rightward.
D)The supply of loanable funds shifted leftward.

Question 25

If the nominal interest rate is 3 percent and the inflation rate is 4 percent,then the real interest rate is

A)7 percent.
B)-1 percent.
C)3 percent.
D)4 percent.

Question 26

Which of the following could explain an increase in the interest rate and the equilibrium quantity of loanable funds?

A)The demand for loanable funds shifted rightward.
B)The demand for loanable funds shifted leftward.
C)The supply of loanable funds shifted rightward.
D)The supply of loanable funds shifted leftward.

Question 27

What would happen in the market for loanable funds if the government were to increase the tax on interest income?

A)Interest rates would rise.
B)Interest rates would be unaffected.
C)Interest rates would fall.
D)The effect on the interest rate is uncertain.

Question 28

If the inflation rate is 2 percent and the real interest rate is 7 percent,then the nominal interest rate is

A)3.5 percent.
B)5 percent.
C)9 percent
D)7 percent.

Question 29

The nominal interest rate is the

A)interest rate corrected for inflation.
B)interest rate as usually reported by banks.
C)real rate of return to the lender.
D)real cost of borrowing to the borrower.

Question 30

What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?

A)There would be an increase in the amount of loanable funds borrowed.
B)There would be a reduction in the amount of loanable funds borrowed.
C)There would be no change in the amount of loanable funds borrowed.
D)The change in loanable funds is uncertain.

Question 31

Which of the following statements is correct?

A)The interest rate that is usually reported is the interest rate that has been corrected for inflation.
B)The supply of,and demand for,loanable funds depend on the real (rather than nominal)interest rate.
C)If the nominal interest rate has decreased and the real interest rate has also decreased,then the inflation rate must have decreased as well.
D)All of the above are correct.

Question 32

Which of the following could explain a decrease in the equilibrium interest rate and in the equilibrium quantity of loanable funds?

A)The demand for loanable funds shifted rightward.
B)The demand for loanable funds shifted leftward.
C)The supply of loanable funds shifted rightward.
D)The supply of loanable funds shifted leftward.

Question 33

Which of the following would necessarily create a surplus at the original equilibrium interest rate in the loanable funds market?

A)an increase in the supply of or a decrease in the demand for loanable funds
B)an increase in the supply of or an increase in the demand for loanable funds
C)a decrease in the supply of or a decrease in the demand for loanable funds
D)a decrease in the supply of or an increase in the demand for loanable funds

Question 34

In 2002 mortgage rates fell and mortgage lending increased.Which of the following could explain both of these changes?

A)The demand for loanable funds shifted rightward.
B)The demand for loanable funds shifted leftward.
C)The supply of loanable funds shifted rightward.
D)The supply of loanable funds shifted leftward.

Question 35

Which of the following statements is correct?

A)As a group,economists see no purpose in distinguishing between the nominal interest rate and the real interest rate.
B)The interest rate that is usually reported is the nominal interest rate.
C)If the nominal interest rate increases and the inflation rate remains unchanged,then the real interest rate decreases.
D)All of the above are correct.

Question 36

Which of the following would necessarily increase the equilibrium interest rate?

A)The demand for and the supply of loanable funds shift right.
B)The demand for and the supply of loanable funds shift left.
C)The demand for loanable funds shifts right and the supply of loanable funds shifts left.
D)The demand for loanable funds shifts left and the supply of loanable funds shifts right.

Question 37

If the supply of loanable funds shifts to the right,then the equilibrium interest rate

A)and quantity of loanable funds rises.
B)and quantity of loanable funds falls.
C)rises and the quantity of loanable funds falls.
D)falls and the quantity of loanable funds rises.

Question 38

Which of the following could explain an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds?

A)The demand for loanable funds shifted right.
B)The demand for loanable funds shifted left.
C)The supply of loanable funds shifted right.
D)The supply of loanable funds shifted left.

Question 39

If the nominal interest rate is 7 percent and the real interest rate is 2 percent,then what is the inflation rate?

A)9.0 percent
B)5 percent
C)3.5 percent
D)None of the above is correct.

Question 40

If the nominal interest rate is 7 percent and the rate of inflation is 3 percent,then the real interest rate is

A)7 percent.
B)4 percent.
C)3 percent.
D)10 percent.

Question 41

Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer's interest income was tax free.This would shift the

A)supply of loanable funds to the right,causing interest rates to fall.
B)supply of loanable funds to the left,causing interest rates to rise.
C)demand for loanable funds to the right,causing interest rates to rise.
D)demand for loanable funds to the left,causing interest rates to fall.

Question 42

What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?

A)The supply of and demand for loanable funds would shift right.
B)The supply of and demand for loanable funds would shift left.
C)The supply of loanable funds would shift right and the demand for loanable funds would shift left.
D)None of the above is correct.

Question 43

Suppose Congress institutes an investment tax credit.What would happen in the market for loanable funds?

A)The interest rate and investment would fall.
B)The interest rate and investment would rise.
C)The interest rate would rise and investment would fall.
D)None of the above is necessarily correct.

Question 44

What would happen in the market for loanable funds if the government were to increase the tax on interest income?

A)The supply of loanable funds would shift right.
B)The demand for loanable funds would shift right.
C)The supply of loanable funds would shift left.
D)The demand for loanable funds would shift left.

Question 45

If in the past Congress had taken additional actions to make saving more rewarding,then today it is likely that the equilibrium interest rate

A)and the equilibrium quantity of loanable funds both would be lower.
B)and the equilibrium quantity of loanable funds both would be higher.
C)would be higher and the equilibrium quantity of loanable funds would be lower.
D)would be lower and the equilibrium quantity of loanable funds would be higher.

Question 46

Suppose that Congress were to institute an investment tax credit.What would happen in the market for loanable funds?

A)The demand for loanable funds would shift left.
B)The supply of loanable funds would shift left.
C)The demand for loanable funds would shift right.
D)The supply of loanable funds would shift right.

Question 47

Suppose a country has only a sales tax.Now suppose it replaces the sales tax with an income tax that includes a tax on interest income.This would make equilibrium

A)interest rates and the equilibrium quantity of loanable funds rise.
B)interest rates rise and the equilibrium quantity of loanable funds fall.
C)interest rates fall and the equilibrium quantity of loanable funds rise.
D)interest rates and the equilibrium quantity of loanable funds fall.

Question 48

Suppose the government were to replace the income tax with a consumption tax so that interest on savings was not taxed.The result would be that the interest rate

A)and investment both would increase.
B)and investment both would decrease.
C)would increase and investment would decrease.
D)would decrease and investment would increase.

Question 49

Suppose a country repealed its investment tax credit.The effects of this are represented by shifting the

A)demand for and the supply of loanable funds to the right.
B)demand for and the supply of loanable funds to the left.
C)supply of loanable funds to the right and the demand for loanable funds to the left.
D)None of the above is correct.

Question 50

Suppose the U.S.offered a tax credit for firms that built new factories in the U.S.Then

A)the demand for loanable funds would shift rightward,initially creating a surplus of loanable funds at the original interest rate.
B)the demand for loanable funds would shift rightward,initially creating a shortage of loanable funds at the original interest rate.
C)the supply of loanable funds would shift rightward,initially creating a surplus of loanable funds at the original interest rate.
D)the supply of loanable funds would shift rightward,initially creating a shortage of loanable funds at the original interest rate.

Question 51

Which of the following is NOT correct?

A)Many economist oppose increases in how much people save.
B)Saving is an important long-run determinant of a nation's standard of living.
C)A change in tax laws that encouraged greater saving would lower interest rates.
D)Taxes on interest income can substantially decrease the future value of current saving.

Question 52

If Congress instituted an investment tax credit,the equilibrium quantity of loanable funds would

A)rise.
B)fall.
C)be unchanged.
D)move in an uncertain direction.

Question 53

In the loanable funds model,an increase in an investment tax credit would create a

A)shortage at the former equilibrium interest rate.This shortage would lead to a rise in the interest rate.
B)shortage at the former equilibrium interest rate.This shortage would lead to a fall in the interest rate.
C)surplus at the former equilibrium interest rate.This surplus would lead to a rise in the interest rate.
D)surplus at the former equilibrium interest rate.This surplus would lead to a fall in the interest rate.

Question 54

Which of the following would not be a result of replacing the income tax with a consumption tax so that interest income was no longer taxed?

A)The interest rate would decrease.
B)Investment would decrease.
C)The standard of living would eventually rise.
D)The supply of loanable funds would shift right.

Question 55

If Congress instituted an investment tax credit,the interest rate would

A)rise and saving would rise.
B)fall and saving would fall.
C)rise and saving would fall.
D)fall and saving would rise.

Question 56

If the government institutes policies that diminish incentives to save,then in the loanable funds market

A)the demand for loanable funds shifts rightward.
B)the demand for loanable funds shifts leftward.
C)the supply of loanable funds shifts rightward.
D)the supply of loanable funds shifts leftward.

Question 57

If a reform of the tax laws encourages greater saving,the result would be

A)higher interest rates and greater investment.
B)higher interest rates and less investment.
C)lower interest rates and greater investment.
D)lower interest rate and less investment.

Question 58

Suppose that Congress were to repeal an investment tax credit.What would happen in the market for loanable funds?

A)The demand and supply of loanable funds would shift right.
B)The demand and supply of loanable funds would shift left.
C)The supply of loanable funds would shift right.
D)The demand for loanable funds would shift left.

Question 59

What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?

A)The supply of loanable funds would shift rightward and investment would increase.
B)The supply of loanable funds would shift leftward and investment would decrease.
C)The demand for loanable funds would shift rightward and investment would increase.
D)The demand for loanable funds would shift leftward and investment would decrease.

Question 60

Suppose a country has a consumption tax that is similar to a state sales tax.If its government were to eliminate the consumption tax and replace it with an income tax that includes an income tax on interest from savings,what would happen?

A)There would be no change in the interest rate or saving.
B)The interest rate would decrease and saving would increase.
C)The interest rate would increase and saving would decrease.
D)None of the above is correct.

Question 61

Suppose government expenditures on goods and services increase,transfers are unchanged,and taxes rise by less than the increase in expenditures.These changes in the government's budget cause

A)both the equilibrium interest rate and the equilibrium quantity of loanable funds to fall.
B)both the equilibrium interest rate and the equilibrium quantity of loanable funds to rise.
C)the equilibrium interest rate to rise and the equilibrium quantity of loanable funds to fall.
D)the equilibrium interest rate to fall and the equilibrium quantity of loanable funds to rise.

Question 62

Other things the same,a government budget deficit

A)reduces public saving,but not national saving.
B)reduces national saving,but not public saving.
C)reduces both public and national saving.
D)reduces neither public saving nor national saving.

Question 63

Suppose a country had a smaller increase in debt in 2011 than it had in 2010.Then other things the same,we would expect

A)lower interest rates and investment in 2011 than in 2010.
B)lower interest rates and greater investment in 2011 than in 2010.
C)higher interest rates and greater investment in 2011 than in 2010.
D)higher interest rates and lower investment in 2011 than in 2010.

Question 64

A larger budget surplus

A)raises the interest rate and investment.
B)reduces the interest rate and investment.
C)raises the interest rate and reduces investment.
D)reduces the interest rate and raises investment.

Question 65

Suppose the government deficit increases,but the interest rate remains the same.Which of the following things might have happened simultaneously to keep interest rates the same?

A)The government reduces the amount that people may put into savings accounts on which the interest is tax exempt.
B)Because they are optimistic about the future of the economy,firms desire to borrow more to purchase physical capital.
C)Consumers decide to decrease consumption and work more.
D)All of the above could explain why the interest rate would be unchanged.

Question 66

Other things the same,if the government increases transfer payments to households,then the effect of this on the government's budget

A)will make investment rise.
B)will make the rate of interest rise.
C)will make public saving rise.
D)All of the above are correct.

Question 67

A larger budget deficit

A)raises the interest rate and investment.
B)reduces the interest rate and investment.
C)raises the interest rate and reduces investment.
D)reduces the interest rate and raises investment.

Question 68

Crowding out occurs when

A)investment declines because a budget deficit makes interest rates rise.
B)investment declines because a budget deficit makes interest rates fall.
C)investment increases because a budget surplus makes interest rates rise.
D)investment increases because a budget surplus makes interest rates fall.

Question 69

Suppose the government ran a budget surplus in 2010 and a larger surplus in 2011.The loanable funds model would predict that,as a result of the increase in the surplus,

A)both the government debt and interest rates increased between 2010 and 2011.
B)both the government debt and interest rates decreased between 2010 and 2011.
C)the government debt increased and interest rates decreased between 2010 and 2011.
D)the government debt decreased and interest rates increased between 2010 and 2011.

Question 70

An increase in the budget deficit would cause a

A)shortage of loanable funds at the original interest rate,which would lead to falling interest rates.
B)surplus of loanable funds at the original interest rate,which would lead to rising interest rates.
C)shortage of loanable funds at the original interest rate,which would lead to rising interest rates.
D)surplus of loanable funds at the original interest rate,which would lead to falling interest rates.

Question 71

Bolivia had a smaller budget deficit in 2003 than in 2002.Other things the same,we would expect this reduction in the budget deficit to have

A)increased both interest rates and investment.
B)increased interest rates and decreased investment.
C)decreased interest rates and increased investment.
D)decreased both interest rates and investment.

Question 72

Suppose government expenditures on goods and services and net taxes both decrease,and expenditures fall by more than net taxes.The effects of these changes on the budget deficit cause

A)both the equilibrium interest rate and the equilibrium quantity of loanable funds to fall.
B)both the equilibrium interest rate and the equilibrium quantity of loanable funds to rise.
C)the equilibrium interest rate to rise and the equilibrium quantity of loanable funds to fall.
D)the equilibrium interest rate to fall and the equilibrium quantity of loanable funds to rise.

Question 73

When the government runs a budget deficit,

A)interest rates are lower than they would be if the budget were balanced.
B)national saving is higher than it would be if the budget were balanced.
C)investment is lower than it would be if the budget were balanced.
D)All of the above are correct.

Question 74

A budget deficit

A)changes the supply of loanable funds.
B)changes the demand for loanable funds.
C)changes both the supply of and demand for loanable funds.
D)does not influence the supply of or the demand for loanable funds.

Question 75

If Canada goes from a large budget deficit to a small budget deficit,it will

A)increase private saving and so shift the supply of loanable funds right.
B)increase investment and so shift the demand for loanable funds right.
C)increase public saving and so shift the supply of loanable funds right.
D)reduce national saving and shift the supply left.

Question 76

A decrease in the budget deficit

A)makes investment spending fall.
B)makes investment spending rise.
C)does not affect investment spending.
D)may increase,decrease,or not affect investment spending if private saving doesn't change.

Question 77

Suppose the Congress and president decreased the maximum annual contributions limits to retirement accounts and at the same time reduced the budget deficit.What would happen to the interest rate?

A)It would decrease.
B)It would increase.
C)It would stay the same.
D)It might do any of the above.

Question 78

Crowding out occurs when investment declines because

A)a budget deficit makes interest rates rise.
B)a budget deficit makes interest rates fall.
C)a budget surplus makes interest rates rise.
D)a budget surplus makes interest rates fall.

Question 79

If the government currently has a budget deficit,then

A)it does not necessarily have a debt.
B)its debt is increasing.
C)government expenditures are greater than taxes.
D)All of the above are correct.

Question 80

In 2009,the U.S.government's budget deficit increased substantially.Other things the same,this means the

A)supply of loanable funds shifted to the right.
B)supply of loanable funds shifted to the left.
C)demand for loanable funds shifted to the right.
D)demand for loanable funds shifted to the left.