Question

In: Economics

1. When interest rates are low, people are more likely to spend (or borrow) and less...

1. When interest rates are low, people are more likely to spend (or borrow) and less likely to save. This is consistent with the slopes of both the demand and supply in the loanable funds market.

	True
	False

2. The loanable funds market is a fundamental piece of a country's ability to grow and develop.

	True
	False

3. Which of the following would SHIFT the demand for loanable funds to the RIGHT (i.e. INCREASE). Select all that apply.

	Expectations that the economy will improve in the near future.
	New tax deductions for Investment. (Businesses can deduct more of their Investment spending and pay less in taxes.)
	Believe that profit margins will increase.
	New tax deductions for retirement savings. (Limitations for 401Ks, IRAs, etc, increase, so people pay less in taxes on money they save.)
	Lower real interest rates.
	Perceptions that the economy is headed downhill.

4. Match each item with the corresponding statement

	Quantity of Loans
	Supply for loanable funds
	Demand for loanable funds
	Real interest rate

1.	Variable on the vertical axis of the loanable funds market
2.	Variable on the horizontal axis of the loanable funds market
3.	Represents the Borrowers, most notably businesses and Investment spending
4.	Represents the lenders, specifically Banks and Savers

5. Which of the following is related to (or occurs during) crowding out?

	reduction in private sector investment
	increased total loans
	increase in the supply of loanable funds
	lower real interest rates
	higher real interest rates
	government deficits
	decreased total loans

6. When the supply of loanable funds increases, the result is an increase in the real interest rates and a decrease in the number of loans granted.

	True
	False

7. When the demand for loanable funds increases, the result is an increase in both the real interest rate and the quantity of loans made.

	True
	False

8. Which of the following would cause the Supply of Loanable funds to shift left (decrease)?

	Higher real interest rates
	New tax policies that remove the tax benefits associated with saving in retirement plans.
	A wide spread belief that we are headed into a recession.
	All of the above.

9. Match the function of money with its definition.

	Things are priced so that you can compare relative prices.
	Widely accepted in the trade for goods and services.
	People will accept it over time, even after you make a purchase today.
	Retains its worth over time.

1.	Medium of Exchange
2.	Store of Value
3.	Unit of Account
4.	Deferred Payment

Solutions

Expert Solution

Answer 1:

True. When rate of interest in the economy is low, then cost of investment will decrease and this will increase demand for loanable funds and decrease the supply of loanable funds because level of savings in the economy will decrease.

Answer 2;

False. The loanable fund market is an important market of the economy but is not a fundamental piece of a country's abiloity to grow and develop.

ANswer 3;

The demand curve for loanable funds shifts rightwards when demand for investment increases at each rate of interest. The following factors can shift the demand curve for loanable funds:

1.Expectations that the economy will improve in the near future- This increases production and thus investment in the economy increases.

2. New tax deductions for Investment.- This will also increase investment level and thus demand for loanbale funds increases in loanable funds market.

3. Believe that profit margins will increase- This will increase production level and thus demand for loanable funds will increase.

Other options are incorrect. New tax deductions for retirement savings increases which will increases supply of loanable funds and thus decrease rate of interest and cause movement on the demand for loanable funds curve.Perceptions that the economy is headed downhill will reduce the demand for loanable funds.

Answer 4:

Quantity of Loans:

.	Variable on the horizontal axis of the loanable funds market

Supply for loanable funds

Represents the lenders, specifically Banks and Savers

Demand for loanable funds

Represents the Borrowers, most notably businesses and Investment spending

Real interest rate

Variable on the vertical axis of the loanable funds market

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

When interest rates rise firms want to borrow less for new plants and equipment and households...

When interest rates rise firms want to borrow less for new plants and equipment and households want to borrow more for home-building. Select one: True False The sticky wage theory of the short-run aggregate supply curve says that when the price level rises more than expected, real wages fall because nominal wages are increasing at a slower rate than the price level. Select one: True False Suppose the economy is in long-run equilibrium. If there is an increase in consumer...

Explain whether the following make collusion more or less likely and why. a) Higher interest rates...

Explain whether the following make collusion more or less likely and why. a) Higher interest rates b) Less frequent interaction between competitors c) Growing profits in the industry d) A firm on the verge of bankruptcy e) A new competitor entering the market

Brooks prefers to borrow for longer periods when interest rates are low and for shorter periods when interest rates are high. Why is this a good business strategy?

Question The following questions are not related. Requirements 1. Duncan Brooks needs to borrow $500,000 to open new stores. Brooks can borrow $500,000 by issuing 5%, 10-year bonds at 96. How much will Brooks actually receive in cash under this arrangement? How much must Brooks pay back at maturity? How will Brooks account for the difference between the cash received on the issue date and the amount paid back? 2. Brooks prefers to borrow for longer periods when interest...

Researchers for an advertising company are interested in determining if people are more likely to spend...

Researchers for an advertising company are interested in determining if people are more likely to spend more money on beer if advertisers put more beer ads on billboards in a neighborhood in Philadelphia. They estimate that 250 people will view their billboard in one week. They determine that the total number of residents in the neighborhood is 600. So, the residents who have not viewed the billboard are in the control group. The researchers determine that those who did view...

By lowering interest rates, it becomes cheaper to borrow money and less profitable to save, which...

By lowering interest rates, it becomes cheaper to borrow money and less profitable to save, which encourages individuals and businesses to spend. Now, since rates are lowered, savings are denied, more money is borrowed and spent. As borrowing increases, the total money supply increases in the economy. Reducing interest rates therefore ultimately results in reduced savings, increased money supply and better spending, which translates into higher overall economic activity, which is a good thing. The bad side is the decline...

1. Describe the relationship between interest rates and bond prices. 2. Would you be more likely...

1. Describe the relationship between interest rates and bond prices. 2. Would you be more likely to invest in bonds at this stage of your life or invest in stocks? Please explain.

Recent research has shown that creative people are more likely to cheat than their less creative...

Recent research has shown that creative people are more likely to cheat than their less creative counterparts (Gino & Ariely, 2011). Participants in the study first completed creativity assessment questionnaires and then returned to the lab several days later for a series of tasks. One task was a multiple-choice general knowledge test for which the participants circled their answers on a test sheet. Afterward, they were asked to transfer their answers to bubble sheets for computer scoring. However, the experimenter...

1. If inflation is expected to be relatively low, then interest rates will tend to be...

1. If inflation is expected to be relatively low, then interest rates will tend to be relatively low, other things held constant. A. True B. False 2. Ms Parker found two opportunities of investment A (rate of return 3%, standard deviation 6%) and investment B (rate of return 8%, standard deviation 4%). Investment B is better than Investment A (hints: calculate each CV and then compare each other). A. True B. False 3. The larger the standard deviation is, the...

Why would low policy rates suggest low long-term interest rates?

Describe how interest rates affect household decisions to save more or less of their income. Given...

Describe how interest rates affect household decisions to save more or less of their income. Given that the Federal Reserve sets interest rates, and given the current average rate of interest earned on savings, what is the incentive in our economy today? How does this affect the housing market? Please use at least 400 words.

Subjects