Question

1.

The supply of loanable funds ultimately depends on:

Group of answer choices

the Federal Reserve's monetary and economic policy

commercial banks' inclination to lend at prevailing interest rates

the time preference for consumption

the opportunities available to use the funds



2.

The interest rates we observe in the economy differ from the risk-free rate because of

Group of answer choices

the real rate of interest.

diversification.

risk premiums.

all the above

Answer 1

1. The supply of loanable funds ultimately depends on :

Ans. the time preference for consumption

The supply of loanable funds ultimately depends on what economists call the time preference for consumption of indivisual, The time preference for consumption refers to whether a person is inclined to spend a dollar of income on current consumption or invest it to grow into something more. Most people have definite preference for current consumption and spend most of their income as its earned, saving only a fraction.

Remember that money saved by indivisuals becomes available for borrowing when people invest their saving in debt securities ans saving account. so people's time preference for consumption dictates the level of their saving and therefore the supply of loanable funds. A decrease in the preference for current consumption.

2. The interest rates we observe in the economy differ from the risk-free rate because of :

Ans. risk premiums

The nominal risk free return is the same for all investments throghout the market. However there are as many different interest rates or expected returns as there are time horizons (ranging from one day to many years) and financial instruments (from passbook saving account to corporate stocks). The interest rates we observe in the economy differ from the nominal risk-free rate due to risk premium. With the possible exception of treasury bills, all investments are risky.