Question 1

The equilibrium interest rate
A)equates the aggregate demand for loanable funds with the aggregate supply of loanable funds.
B)equates the elasticity of the aggregate demand for and supply of loanable funds.
C)decreases as the aggregate supply of loanable funds decreases.
D)increases as the aggregate demand for loanable funds decreases.

Accepted Answer

The equilibrium interest rate is determined at the point where the aggregate demand for loanable funds equals the aggregate supply of loanable funds. This balance ensures that the amount of funds borrowers want to borrow matches the amount lenders want to lend at a specific interest rate.

Question 2

If economic conditions become less favorable, then
A)expected cash flows on various projects will increase.
B)the required rate of return on projects will increase.
C)there will be additional acceptable business projects.
D)there will be a decreased demand by business for loanable funds.

Accepted Answer

D

Question 3

The quantity of loanable funds supplied is normally
A)highly interest-elastic.
B)more interest-elastic than the demand for loanable funds.
C)less interest-elastic than the demand for loanable funds.
D)equally as interest-elastic as the demand for loanable funds.
E)highly interest-elastic AND more interest-elastic than the demand for loanable funds.

Accepted Answer

The quantity of loanable funds supplied is typically less interest-elastic than the demand for loanable funds. This means that the supply of loanable funds does not respond as strongly to changes in interest rates as the demand for those funds does.

Question 4

Businesses demand loanable funds to
A)finance installment debt.
B)subsidize other companies.
C)invest in long-term (fixed)assets.
D)None of these are correct.

Accepted Answer

Businesses demand loanable funds primarily to invest in long-term (fixed) assets, such as buildings, machinery, and equipment, which are essential for expansion and increasing productivity.

Question 5

Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal? ​
A)a decrease in saving by foreign savers
B)an increase in inflation
C)pessimistic economic projections that cause businesses to reduce expansion plans
D)a decrease in saving by U.S. households

Accepted Answer

Pessimistic economic projections can lead to businesses reducing their expansion plans, which in turn decreases the demand for loans. Lower demand for loans can lead to a decrease in the equilibrium interest rate, as less borrowing demand puts downward pressure on rates.

Question 6

The Fisher effect states that the ​
A)nominal interest rate equals the expected inflation rate plus the real rate of interest.
B)nominal interest rate equals the real rate of interest minus the expected inflation rate.
C)real rate of interest equals the nominal interest rate plus the expected inflation rate.
D)expected inflation rate equals the nominal interest rate plus the real rate of interest.

Accepted Answer

The Fisher effect describes the relationship between nominal interest rates, real interest rates, and inflation, stating that the nominal interest rate is the sum of the real interest rate and the expected inflation rate.

Question 7

The federal government's demand for loanable funds is ____. If the budget deficit is expected to increase, the federal government's demand for loanable funds will ____.
A)interest-elastic; decrease
B)interest-elastic; increase
C)interest-inelastic; increase
D)interest-inelastic; decrease

Accepted Answer

The federal government's demand for loanable funds is generally considered interest-inelastic because it borrows based on budgetary needs rather than interest rates. If the budget deficit is expected to increase, the federal government's demand for loanable funds will increase to finance the larger deficit.

Question 8

The equilibrium interest rate should
A)fall when the aggregate supply of funds exceeds the aggregate demand for funds.
B)rise when the aggregate supply of funds exceeds the aggregate demand for funds.
C)fall when the aggregate demand for funds exceeds the aggregate supply of funds.
D)rise when the aggregate demand for funds equals the aggregate supply of funds.
E)rise when the aggregate supply of funds exceeds the aggregate demand for funds AND fall when the aggregate demand for funds exceeds the aggregate supply of funds.

Accepted Answer

When the aggregate supply of funds exceeds the aggregate demand for funds, there is a surplus of funds, leading to a decrease in the equilibrium interest rate.

Question 9

The ____ sector is the largest supplier of loanable funds.
A)household
B)government
C)business
D)None of these are correct.

Accepted Answer

The household sector is the largest supplier of loanable funds because households generally save a portion of their income, which is then deposited into financial institutions. These savings become available for lending to businesses and governments.

Question 10

The demand for funds resulting from business investment in new projects is ____ related to the number of projects implemented, and is therefore ____ related to the interest rate.
A)inversely; positively
B)positively; inversely
C)inversely; inversely
D)positively; positively

Accepted Answer

The demand for funds increases with the number of projects (positively related), but as interest rates rise, the cost of borrowing increases, making fewer projects financially viable, thus demand for funds decreases (inversely related).

Question 11

If interest rates are ____, ____ projects will have expected returns that exceed a business's particular required rate of return.
A)higher; more
B)lower; more
C)lower; no
D)None of these are correct.

Accepted Answer

When interest rates are lower, the cost of borrowing decreases, making it more likely for projects to have expected returns that exceed a business's particular required rate of return. This is because the lower cost of financing increases the net present value of future cash flows from projects.

Question 12

The required return to implement a given business project will be ____ if interest rates are lower. This implies that businesses will demand a ____ quantity of loanable funds when interest rates are lower. ​
A)greater; lower
B)lower; greater
C)lower; lower
D)greater; greater

Accepted Answer

When interest rates are lower, the required return to implement a given business project is also lower, making borrowing more attractive. Consequently, businesses will demand a greater quantity of loanable funds to finance their projects due to the lower cost of borrowing.

Question 13

For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign governments or firms will be ____ U.S. interest rates.
A)positively related to
B)inversely related to
C)unrelated to
D)None of these are correct.

Accepted Answer

The quantity of U.S. loanable funds demanded by foreign governments or firms will be inversely related to U.S. interest rates. This means that as U.S. interest rates increase, the demand for U.S. loanable funds by foreign entities decreases, and vice versa.

Question 14

As a result of more favorable economic conditions, there is a(n)____ demand for loanable funds, causing an ____ shift in the demand curve.
A)decreased; inward
B)decreased; outward
C)increased; outward
D)increased; inward

Accepted Answer

More favorable economic conditions typically increase the demand for loanable funds as businesses and individuals are more willing to borrow for investment and consumption, leading to an outward shift in the demand curve.

Question 15

At any given point in time, households would demand a ____ quantity of loanable funds at ____ rates of interest.
A)greater; higher
B)greater; lower
C)smaller; lower
D)None of these are correct.

Accepted Answer

Households generally demand a greater quantity of loanable funds at lower rates of interest because the cost of borrowing is cheaper, making loans more attractive for financing purchases or investments.

Question 16

The level of installment debt as a percentage of disposable income is generally ____ during recessionary periods. ​
A)higher
B)lower
C)zero
D)negative

Accepted Answer

During recessionary periods, people tend to reduce their spending and borrowing, leading to a lower level of installment debt as a percentage of disposable income.

Question 17

Other things being equal, foreign governments and corporations would demand ____ U.S. funds if their local interest rates were lower than U.S. rates. Therefore, for a given set of foreign interest rates, foreign demand for U.S. funds is ____ related to U.S. interest rates. ​
A)less; inversely
B)more; positively
C)less; positively
D)more; inversely

Accepted Answer

The answer of Other things being equal, foreign governments and...

Question 18

If a strong economy allows for a large ____ in households' income, the supply curve will shift ____.
A)decrease; outward
B)increase; inward
C)increase; outward
D)None of these are correct.

Accepted Answer

A strong economy typically leads to an increase in households' income, which can increase the supply of goods and services, shifting the supply curve outward.

Question 19

If the real interest rate was negative for a period of time, then
A)inflation is expected to exceed the nominal interest rate in the future.
B)inflation is expected to be less than the nominal interest rate in the future.
C)actual inflation was less than the nominal interest rate during that period of time .
D)actual inflation was greater than the nominal interest rate during that period of time .

Accepted Answer

A negative real interest rate occurs when the inflation rate is higher than the nominal interest rate, meaning the purchasing power of interest earnings is decreasing.

Question 20

If inflation is expected to decrease, then ​
A)savers will provide less funds at the existing equilibrium interest rate.
B)the equilibrium interest rate will increase.
C)the equilibrium interest rate will decrease.
D)borrowers will demand more funds at the existing equilibrium interest rate.

Accepted Answer

When inflation is expected to decrease, the real value of money increases, making it more attractive to hold onto money rather than spend it. This leads to a decrease in the demand for loans and an increase in savings, which in turn lowers the equilibrium interest rate.

Quiz 2: Determination of Interest Rates

The equilibrium interest rate

If economic conditions become less favorable, then

The quantity of loanable funds supplied is normally

Businesses demand loanable funds to

Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal?

The Fisher effect states that the

The federal government's demand for loanable funds is . If the budget deficit is expected to increase, the federal government's demand for loanable funds will .

The equilibrium interest rate should

The ____ sector is the largest supplier of loanable funds.

The demand for funds resulting from business investment in new projects is related to the number of projects implemented, and is therefore related to the interest rate.

If interest rates are , projects will have expected returns that exceed a business's particular required rate of return.

The required return to implement a given business project will be if interest rates are lower. This implies that businesses will demand a quantity of loanable funds when interest rates are lower.

For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign governments or firms will be ____ U.S. interest rates.

As a result of more favorable economic conditions, there is a(n) demand for loanable funds, causing an shift in the demand curve.

At any given point in time, households would demand a quantity of loanable funds at rates of interest.

The level of installment debt as a percentage of disposable income is generally ____ during recessionary periods.

Other things being equal, foreign governments and corporations would demand U.S. funds if their local interest rates were lower than U.S. rates. Therefore, for a given set of foreign interest rates, foreign demand for U.S. funds is related to U.S. interest rates.

If a strong economy allows for a large in households' income, the supply curve will shift .

If the real interest rate was negative for a period of time, then

If inflation is expected to decrease, then

Quiz 2: Determination of Interest Rates

The equilibrium interest rate

If economic conditions become less favorable, then

The quantity of loanable funds supplied is normally

Businesses demand loanable funds to

Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal? ​

The Fisher effect states that the ​

The federal government's demand for loanable funds is ____. If the budget deficit is expected to increase, the federal government's demand for loanable funds will ____.

The equilibrium interest rate should

The ____ sector is the largest supplier of loanable funds.

The demand for funds resulting from business investment in new projects is ____ related to the number of projects implemented, and is therefore ____ related to the interest rate.

If interest rates are ____, ____ projects will have expected returns that exceed a business's particular required rate of return.

The required return to implement a given business project will be ____ if interest rates are lower. This implies that businesses will demand a ____ quantity of loanable funds when interest rates are lower. ​