Deck 2: Determination of Interest Rates

Question 1

The required return to implement a given business project will be ____ if interest rates are lower. This implies that businesses will demand a ____ quantity of loanable funds when interest ratesare lower.

A) greater; lower
B) lower; greater
C) lower; lower
D) greater; greater

Answer 1

B

Question 2

Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal?

A) a decrease in saving by foreign savers
B) an increase in inflation
C) pessimistic economic projections that cause businesses to reduce expansion plans
D) a decrease in saving by U.S. households

Answer 2

C

Question 3

The federal government's demand for loanable funds is ____. If the budget deficit is expected to increase, the federal government's demand for loanable funds would ____.

A) interest-elastic; decrease
B) interest-elastic; increase
C) interest-inelastic; increase
D) interest-inelastic; decrease

Answer 3

C

Question 4

Other things being equal, foreign governments and corporations would demand ____ U.S. funds if their local interest rates were lower than U.S. rates. Therefore, for a given set of foreign interest rates, foreign demand for U.S. funds is ____ related to U.S. interest rates.

A) less; inversely
B) more; positively
C) less; positively
D) more; inversely

Question 5

If the real interest rate was negative for a period of time, then

A) inflation is expected to exceed the nominal interest rate in the future.
B) inflation is expected to be less than the nominal interest rate in the future.
C) actual inflation was less than the nominal interest rate.
D) actual inflation was greater than the nominal interest rate.

Question 6

At any given point in time, households would demand a ____ quantity of loanable funds at ____ rates of interest.

A) greater; higher
B) greater; lower
C) smaller; lower
D) none of the above

Question 7

The Fisher effect states that the

A) nominal interest rate equals the expected inflation rate plus the real rate of interest.
B) nominal interest rate equals the real rate of interest minus the expected inflation rate.
C) real rate of interest equals the nominal interest rate plus the expected inflation rate.
D) expected inflation rate equals the nominal interest rate plus the real rate of interest.

Question 8

The quantity of loanable funds supplied is normally

A) highly interest-elastic.
B) more interest-elastic than the demand for loanable funds.
C) less interest-elastic than the demand for loanable funds.
D) equally as interest-elastic as the demand for loanable funds.
E) A and B

Question 9

Businesses demand loanable funds to

A) finance installment debt.
B) subsidize other companies.
C) invest in fixed and short-term assets.
D) none of the above

Question 10

The equilibrium interest rate

A) equates the aggregate demand for funds with the aggregate supply of loanable funds.
B) equates the elasticity of the aggregate demand and supply for loanable funds.
C) decreases as the aggregate supply of loanable funds decreases.
D) increases as the aggregate demand for loanable funds decreases.

Question 11

If interest rates are ____, ____ projects will have positive NPVs.

A) higher; more
B) lower; more
C) lower; no
D) none of the above

Question 12

The equilibrium interest rate should

A) fall when the aggregate supply of funds exceeds the aggregate demand for funds.
B) rise when the aggregate supply of funds exceeds the aggregate demand for funds.
C) fall when the aggregate demand for funds exceeds the aggregate supply of funds.
D) rise when the aggregate demand for funds equals the aggregate supply of funds.
E) B and C

Question 13

For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign governments or firms will be ____ U.S. interest rates.

A) positively related to
B) inversely related to
C) unrelated to
D) none of the above

Question 14

If inflation is expected to decrease, then

A) savers will provide less funds at the existing equilibrium interest rate.
B) the equilibrium interest rate will increase.
C) the equilibrium interest rate will decrease.
D) borrowers will demand more funds at the existing equilibrium interest rate.

Question 15

The demand for funds resulting from business investment in short-term assets is ____ related to the number of projects implemented, and is therefore ____ related to the interest rate.

A) inversely; positively
B) positively; inversely
C) inversely; inversely
D) positively; positively

Question 16

As a result of more favorable economic conditions, there is a(n) ____ demand for loanable funds, causing an ____ shift in the demand curve.

A) decreased; inward
B) decreased; outward
C) increased; outward
D) increased; inward

Question 17

The ____ sector is the largest supplier of loanable funds.

A) household
B) government
C) business
D) none of the above

Question 18

If economic conditions become less favorable, then:

A) expected cash flows on various projects will increase.
B) more proposed projects will have expected returns greater than the hurdle rate.
C) there would be additional acceptable business projects.
D) there would be a decreased demand by business for loanable funds.

Question 19

The level of installment debt as a percentage of disposable income is generally ____ during recessionary periods.

A) higher
B) lower
C) zero
D) negative

Question 20

If a strong economy allows for a large ____ in households' income, the supply curve will shift ____.

A) decrease; outward
B) increase; inward
C) increase; outward
D) none of the above

Question 21

If the federal government reduces its budget deficit, this causes a(n) ____ in the supply of loanable funds and a(n) ____ in the demand for loanable funds.

A) increase; no change
B) decrease; no change
C) no change; increase
D) no change; decrease

Question 22

Which of the following will probably not result in an increase in the business demand for loanable funds?

A) an increase in positive net present value (NPV) projects
B) a reduction in interest rates on business loans
C) a recession
D) none of the above

Question 23

The federal government's spending policies are generally thought to be _________ interest rates, but municipal governments' spending is somewhat ________ interest rates.

A) independent of; sensitive to
B) sensitive to; independent of
C) inversely rated to; positively related to
D) positively related to; inversely related to

Question 24

If the real interest rate is expected to become negative, then the purchasing power of savings would be ____, as the inflation rate is expected to be ____ the existing nominal interest rate.

A) decreasing; less than
B) decreasing; greater than
C) increasing; greater than
D) increasing; less than

Question 25

If economic expansion is expected to decrease, the demand for loanable funds should ____ and interest rates should ____.

A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Question 26

Which of the following is not true regarding foreign interest rates?

A) The large flow of funds between countries causes interest rates in any given country to become more susceptible to interest rate movements in other countries.
B) The expectations of a strong dollar should cause a flow of funds to the United States.
C) An increase in a foreign country's interest rates will encourage investors in that country to invest their funds in other countries.
D) All of the above are true regarding foreign interest rates.

Question 27

If inflation turns out to be lower than expected

A) savers benefit.
B) borrowers benefit while savers are not affected.
C) savers and borrowers are equally affected.
D) savers are adversely affected but borrowers benefit.

Question 28

The federal government's _________ determines the budget deficit and therefore determines the government's demand for loanable funds.

A) monetary policy
B) fiscal policy
C) congressional policy
D) economic policy

Question 29

If the federal government needs to borrow additional funds, this borrowing reflects a(n) ____ in the supply of loanable funds and a(n) ____ in the demand for loanable funds.

A) increase; no change
B) decrease; no change
C) no change; increase
D) no change; decrease

Question 30

Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. securities and to instead increase their holdings of securities in their own countries. This should cause the supply of loanable funds in the United States to______ and should place ____ pressure on U.S. interest rates.

A) decrease; upward
B) decrease; downward
C) increase; downward
D) increase; upward

Question 31

Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. securities. This should cause the supply of loanable funds in the United States to____ and should place ____ pressure on U.S. interest rates.

A) decrease; upward
B) decrease; downward
C) increase; downward
D) increase; upward

Question 32

What is the basis of the relationship between the Fisher effect and the loanable funds theory?

A) the saver's desire to maintain the existing real rate of interest
B) the borrower's desire to achieve a positive real rate of interest
C) the saver's desire to achieve a negative real rate of interest
D) B and C

Question 33

When there are expectations of higher inflation in the future, we would typically expect the supply of loanable funds to ____ and the demand for loanable funds to ____.

A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease

Question 34

If the economy weakens, there is ____ pressure on interest rates. If the Federal Reserve increases the money supply there is ____ pressure on interest rates (assume that inflationary expectationsare not affected).

A) upward; upward
B) upward; downward
C) downward; upward
D) downward; downward

Question 35

A ____ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an ____ shift in the demand schedule.

A) higher; inward
B) higher; outward
C) lower; outward
D) none of the above

Question 36

If investors shift funds from stocks into bank deposits, this ____ the supply of loanable funds and places ____ pressure on interest rates.

A) increases; upward
B) increases; downward
C) decreases; downward
D) decreases; upward

Question 37

Canada and the United States are major trading partners. If Canada experiences a major increase in economic growth, that could place ____ pressure on Canadian interest rates and ____ pressureonU.S. interest rates.

A) upward; upward
B) upward; downward
C) downward; downward
D) downward; upward

Question 38

When Japanese interest rates rise, and if exchange rate expectations remain unchanged, the most likely effect is that the supply of loanable funds provided by Japanese investors to the UnitedStates will ____, and U.S. interest rates will ____.

A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Question 39

If the aggregate demand for loanable funds increases without a corresponding ____ in aggregate supply, there will be a ____ of loanable funds.

A) increase; surplus
B) increase; shortage
C) decrease; surplus
D) decrease; shortage

Question 40

Which of the following is least likely to affect household demand for loanable funds?

A) a decrease in tax rates
B) an increase in interest rates
C) a reduction in positive net present value (NPV) projects available
D) All of the above are equally likely to affect household demand for loanable funds.

Question 41

Since the aggregate demand for loanable funds is the sum of the quantities demanded by the separate sectors, and since most of these sectors are likely to demand a larger quantity of funds atlower interest rates (other things being equal), the aggregate demand for loanable funds is positively related to interest rates at any point in time.

Question 42

Other things being equal, a ____ quantity of U.S. funds would be demanded by foreign governments and corporations if their domestic interest rates were ____ relative to U.S. rates.

A) smaller; high
B) larger; high
C) larger; low
D) none of the above

Question 43

The substantial decline in interest rates during the credit crisis is attributed to which of the following changes in the market for loanable funds?

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

Question 44

The supply of loanable funds in the United States is partly determined by the monetary policy implemented by the Federal Reserve System.

Question 45

The business demand for funds resulting from short-term investments is inversely related to the number of projects implemented and inversely related to the interest rate.

Question 46

In computing the net present value of a proposed project, the required rate of return to implement the project will be ______ if interest rates are ________.

A) lower; higher
B) lower; lower
C) higher; lower
D) higher; unchanged

Question 47

The crowding-out effect occurs when:

A) foreign investors crowd out U.S. investors in the market for loanable funds.
B) the federal government's demand for loanable funds due to a higher budget deficit crowds out the private demand in the market for loanable funds.
C) institutional investors crowd out individual investors in the market for loanable funds.
D) firms and municipal governments crowd out households in the market for loanable funds.

Question 48

Other things being equal, a smaller quantity of U.S. funds would be demanded by foreign governments and corporations if their domestic interest rates were high relative to U.S. rates.

Question 49

Which of the following statements is incorrect?

A) The Fed's monetary policy is intended to influence U.S. economic conditions.
B) The Fed's monetary policy affects the supply of loanable funds, which affects interest rates.
C) By influencing interest rates, the Fed is able to influence the amount of money that corporations and households are willing to borrow and spend.
D) All of the statements above are true.

Question 50

According to the Fisher effect, expectations of higher inflation cause savers to require a ____ on savings.

A) higher nominal interest rate
B) higher real interest rate
C) lower nominal interest rate
D) lower real interest rate

Question 51

The real interest rate can be forecasted by subtracting the ___ from the ____ for that period.

A) nominal interest rate; expected inflation rate
B) prime rate; nominal interest rate
C) expected inflation rate; nominal interest rate
D) prime rate; expected inflation rate

Question 52

The expected impact of an increased expansion by businesses is an ____ shift in the demand schedule and ____ in the supply schedule.

A) inward; an inward shift
B) inward; an outward shift
C) outward; an inward shift
D) outward; no obvious change

Question 53

According to the loanable funds theory, market interest rates are determined by the factors that control the supply of and demand for loanable funds.

Question 54

The federal government demand for funds is said to be interest-inelastic, or ____ to interest rates.

A) sensitive
B) insensitive
C) relatively sensitive as compared to other sectors
D) none of the above

Question 55

Which of the following is a valid representation of the Fisher effect?

A) i = E(INF) + iR
B) iR = E(INF) + i
C) E(INF) = i + iR
D) none of the above

Question 56

The ____ suggests that the market interest rate is determined by factors that control the supply of and demand for loanable funds.

A) Fisher effect
B) loanable funds theory
C) real interest rate
D) none of the above

Question 57

If foreign interest rates fall, foreign firms and governments would likely reduce their demand for U.S. funds.

Question 58

The federal government's demand for funds is ________, and municipal governments' demand for funds is somewhat ____________.

A) interest-inelastic; interest-inelastic
B) interest-elastic; interest-elastic
C) interest-inelastic; interest-elastic
D) interest-elastic; interest-inelastic

Question 59

When forecasting future interest rates, if the net demand for funds (ND) is _____, there will be an ______ adjustment in interest rates.

A) negative; upward
B) negative; downward
C) positive; upward
D) positive; downward

Question 60

At any point in time, households and businesses demand a greater quantity of loanable funds at lower rates of interest.

Question 61

Forecasters should consider future plans for corporate expansion and the future state of the economy when forecasting business demand for loanable funds.

Question 62

According to the Fisher effect, when the inflation rate is lower than anticipated, the real interest rate is relatively low.

Question 63

The relationship between interest rates and expected inflation is often referred to as the loanable funds theory.

Question 64

To forecast interest rates using the Fisher effect, the real interest rate for an upcoming period can be forecasted by subtracting the expected inflation rate over that period from the nominalinterest rate quoted for that period.

Question 65

According to the Fisher effect, if the real interest rate is zero, the nominal interest rate must be equal to the expected inflation rate.

Question 66

If the aggregate demand for loanable funds increases without a corresponding increase in aggregate supply, there will be a surplus of loanable funds.

Question 67

In general, suppliers of loanable funds are willing to supply more funds if the interest rate is higher.