Question

1. Suppose that a bank increases its interest rates. If people are rational, how will the higher interest rates affect their borrowing (ceteris paribus)?

   1. People will borrow more

   2. People will borrow less

   3. People will not change their borrowing habits

2. Suppose than an economy is in an inflationary gap, which of the following must happen for this problem to fix itself, according to classical economists?

   1. Wages must rise

   2. Wages must fall

3. Which of the following best illustrates Say's Law?

   1. If I want to buy something, someone will sell it.

   2. If I produce something, someone will buy it

   3. If I sell something, I now have money and this money will be spent

4. Draw a market for loanable funds. Assume that banks are choosing to hold some of the money saved in their vaults. Based on this information, what do we know to be true?

   1. This market must operate with a surplus

   2. This market must operate with a shortage

   3. This market must operate at equilibrium

Answer 1

1) increase in interest rates discourages borrowing. This is because now cost of borrowing increases. Hence, if people are rational then with higher interest rates, people will borrow less.

Therefore, option b is correct

2) if an economy is in an inflationary gap then according to classical economists and increase in Wages is a must so that the Economy could return to full Employment,and the problem could be fixed itself.

Therefore, option a is correct i.e, wages must Increase.

3)" if I produce something, someone will buy it " decribes and illustrates best the Say's law.

Hence, option b is correct.

4) if banks are choosing to hold some of the money saved in their vaults, even then the market must operate at equilibrium. This is because if banks do so, supply of loanable funds Decreases and at any given interest rate supply of loanable funds would be smaller than the demand for loanable funds. But then there will be an increase in the equilibrium interest rate such that the market will again come in equilibrium where the supply of loanable funds would be equal to the demand for loanable funds at the increased interest rates. Hence, this market must operate at equilibrium due to the adjustment in Interest rates.

Therefore, option c is correct.