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

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 2 years ago

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