2. According to the textbook, which of the following statements is (are) correct? (x) The price...

2. According to the textbook, which of the following statements is (are) correct?
(x) The price of loanable funds is the interest rate and the interest rate is determined by the forces of supply and demand in the loanable funds market.
(y) The supply of loanable funds slopes upward because an increase in the interest rate provides an incentive for people to save more.
(z) The demand for loanable funds slopes downward because a decrease in the interest rate provides an incentive for people to borrow more.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

4. Suppose a surplus of loanable funds exists at the present interest rate in the loanable funds market. Given the presence of this disequilibrium,
A. the supply of loanable funds will shift to the right and the demand will shift to the left.
B. the supply of loanable funds will shift to the left and the demand will shift to the right.
C. both the supply of loanable funds and the demand will shift to the right.
D. neither curve shifts, but the quantity supplied will increase and the quantity demanded will decrease as the interest rate rises to equilibrium.
E. neither curve shifts, but the quantity supplied will decrease and the quantity demanded will increase as the interest rate falls to equilibrium.

5. According to the textbook, which of the following statements about the loanable funds market is (are) correct?
(x) When the supply of loanable funds shifts to the right then the equilibrium real interest rate decreases and the equilibrium quantity of loanable funds decreases.
(y) When the demand for loanable funds shifts to the right then the equilibrium real interest rate increases and the equilibrium quantity of loanable funds increases.
(z) If the demand for loanable funds shifts to the right and the supply of loanable funds shifts to the left, then the real interest rate rises.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (y) only

Solutions

Expert Solution

2. The price of loanable funds is the interest rate. For savers, it is the reward for savings and savings is the source of supply of loanable funds. For borrowers, it is the cost of borrowing and investment is the source of demand for loanable funds. This interest rate in a loanable funds market, is determined by the forces of supply and demand for loanable funds.

Demand for loanable funds slopes downward because it shows an inverse relationship between real interest rate and quantity of loanable funds demanded. A decrease in the interest rate means cost of borrowing decreases, therefore it provides an incentive for people to borrow more, increasing the quantity of loanable funds demanded.

The supply of loanable funds slopes upward because it shows a direct relationship between real interest rate and quantity of loanable funds supplied. An increase in the interest rate means savers will save more as they will get more interest on their savings.

Answer: Option A

3. A surplus of loanable funds exists at the present interest rate in loanable funds market means the interest rate is more than equilibrium interest rate. At that rate, quantity of loanable funds supplied exceeds quantity of loanable funds demanded. In this case, to sell off the excess loanable funds sellers will decrease the interest rate and as interest rate is decreases, quantity of loanable funds demanded will increase and quantity of loanable funds supplied will decrease, thus the market will reach equilibrium.

Answer: option E

Rahul Sunny answered 1 year ago

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