Question 1

Suppose the government changed the tax laws,with the result that people were encouraged to consume more and save less.Using the loanable funds model,a consequence would be

Accepted Answer

When people consume more and save less, the supply of loanable funds decreases, leading to higher interest rates and lower investment.

Question 2

Which of the following statements is not correct?

Accepted Answer

The statement that "the ratio of debt to GDP in the United States has always been less than one" is not correct. There have been periods in US history where the debt-to-GDP ratio has been higher than one, particularly during times of war or economic crisis.

Question 3

A change in the tax laws that increases the supply of loanable funds will have a smaller effect on investment when

Accepted Answer

When the demand for loanable funds is more inelastic and the supply of loanable funds is more elastic, a change in the tax laws that increases the supply of loanable funds will have a smaller effect on investment. This is because despite an increase in the supply of loanable funds, the demand for loanable funds is not sensitive to changes in interest rates, thus the investment does not increase much.

Question 4

The ratio of debt to GDP in the United States

Accepted Answer

A) The US has traditionally increased its debt in wartime, such as during World War II and the wars in Iraq and Afghanistan.

B) The ratio of debt to GDP in the US increased significantly during the decade that began in 2001, largely due to the cost of the wars in Iraq and Afghanistan, as well as the 2008 financial crisis.

C) In the late 1990s, the US experienced a budget surplus, which led to a decrease in the ratio of debt to GDP.

Therefore, all of the above options are correct.

Question 5

A policy that induces people to save more shifts

Accepted Answer

When people save more, the supply of loanable funds increases. This is because these savings are available for investment, and hence the funds available for borrowing (loanable funds) increase. As a result, the demand for investment also increases leading to an increase in investment. Hence, when people save more, the supply of loanable funds shifts rightward and increases investment.

Question 6

The supply of loanable funds would shift to the right if either

Accepted Answer

Tax reforms that encourage greater saving would increase the supply of loanable funds, as savers would be willing to lend more money. Similarly, if the budget deficit became smaller, there would be less need for the government to borrow, freeing up loanable funds. Increasing investment tax credits, as in choice B, would stimulate investment and increase the demand for loanable funds, not the supply. The scenarios in choice C and D would reduce the supply of loanable funds: a larger budget deficit would increase the government's demand for borrowing, and tax reforms that discourage saving would reduce the willingness of savers to lend.

Question 7

If we were to change the interpretation of the term "loanable funds" in such a way that government budget deficits would affect the demand for loanable funds,rather than the supply of loanable funds,then

Accepted Answer

Changing the interpretation of how government budget deficits affect the loanable funds market (from affecting supply to affecting demand) does not alter the underlying economic mechanisms or outcomes; it merely changes the terminology used to describe these processes.

Question 8

A government budget deficit affects the supply of loanable funds,rather than the demand for loanable funds,because

Accepted Answer

In the loanable funds model, "loanable funds" are defined as the flow of resources available to fund private investment. A government budget deficit reduces the supply of loanable funds by increasing the government's demand for funds to finance the deficit. This competition for funds can cause interest rates to rise, making it more expensive for private investors to borrow money and lowering the overall supply of loanable funds available for private investment. Therefore, a government budget deficit affects the supply of loanable funds in the market, not the demand side.

Question 9

Which of the following events could explain an increase in interest rates together with a decrease in investment?

Accepted Answer

If the government budget goes from surplus to deficit, it is likely that the government will increase borrowing to finance the deficit, leading to an increase in interest rates. At the same time, investors may become less willing to invest due to concerns about the government's ability to repay its debt, resulting in a decrease in investment. Options B and C would both tend to stimulate investment rather than decrease it. Option D is incorrect as there must be some logical explanation for the increase in interest rates and decrease in investments.

Question 10

The source of the supply of loanable funds is

Accepted Answer

The source of the supply of loanable funds is saving because individuals and households save a portion of their income and deposit it in banks, which in turn lend out these savings to borrowers. The source of the demand for loanable funds is investment because businesses and entrepreneurs need funds to finance their investment projects such as building new factories or buying new equipment. Therefore, option A is the correct choice.

Question 11

A policy that induces people to save more shifts

Accepted Answer

A policy that induces people to save more increases the supply of loanable funds, which typically leads to a reduction in interest rates as there is more capital available for borrowing.

Question 12

Interest rates fall and investment falls.Which of the following could explain these changes?

Accepted Answer

When the government repeals an investment tax credit, the cost of investment for firms increases, which causes a decrease in investment. This decrease in investment will likely lead to a decrease in interest rates due to a decrease in demand for credit. Therefore, both the decrease in interest rates and investment can be explained by the government repealing an investment tax credit. Option A does not explain the relationship between interest rates and investment. Option C may have some impact on the economy, but it does not directly explain the changes in interest rates and investment. Option D is incorrect because a change in government policies or economic conditions can always be a possible explanation for changes in interest rates and investment.

Question 13

Which of the following counts as part of the supply of loanable funds?

Accepted Answer

Both bank deposits and purchases of bonds are sources of funds that can be loaned out, therefore they both count as part of the supply of loanable funds.

Question 14

If the government instituted an investment tax credit,then which of the following would be higher in equilibrium?

Accepted Answer

An investment tax credit would encourage investment and increase the demand for loanable funds, causing the interest rate to rise. The higher interest rate would also make saving more attractive, as individuals would earn a higher return on their saved funds. Therefore, both saving and the interest rate would be higher in equilibrium.

Question 15

According to the loanable funds model,which of the following events would result in higher interest rates and greater saving?

Accepted Answer

When tax laws encourage greater investment, the demand for loanable funds increases, leading to higher interest rates and greater saving.

Question 16

Which of the following events could explain a decrease in interest rates together with an increase in investment?

Accepted Answer

The answer of Which of the following events could explain...

Question 17

In the market for loanable funds,the interaction of the demand for,and supply of,loanable funds determines the equilibrium level of

Accepted Answer

The demand for loanable funds is based on the amount of funds borrowers are willing to borrow at different interest rates, while the supply of loanable funds is based on the amount of funds lenders are willing to lend at different interest rates. The equilibrium level of the real interest rate is determined at the point where the demand for and supply of loanable funds intersect. Thus, the correct answer is C - the real interest rate. The inflation rate and gross domestic product are not directly determined by the demand and supply of loanable funds, and the nominal interest rate is not the equilibrium level but is instead affected by inflation and other factors.

Question 18

Which of the following is included in the demand for loanable funds?

Accepted Answer

The answer of Which of the following is included in...

Question 19

Which of the following events could explain an increase in interest rates together with an increase in investment?

Accepted Answer

The government instituting an investment tax credit would incentivize investment, leading to an increase in investment. This increase in demand for investment funds would lead to an increase in interest rates.

Question 20

Which of the following is correct?

Accepted Answer

In a closed economy, the equilibrium in the market for loanable funds occurs where saving equals investment, as savings provide the funds for investment.

Quiz 13: Saving Investment and the Financial System: The Market for Loanable Funds

Suppose the government changed the tax laws,with the result that people were encouraged to consume more and save less.Using the loanable funds model,a consequence would be

Which of the following statements is not correct?

A change in the tax laws that increases the supply of loanable funds will have a smaller effect on investment when

The ratio of debt to GDP in the United States

A policy that induces people to save more shifts

The supply of loanable funds would shift to the right if either

If we were to change the interpretation of the term "loanable funds" in such a way that government budget deficits would affect the demand for loanable funds,rather than the supply of loanable funds,then

A government budget deficit affects the supply of loanable funds,rather than the demand for loanable funds,because

Which of the following events could explain an increase in interest rates together with a decrease in investment?

The source of the supply of loanable funds is

A policy that induces people to save more shifts

Interest rates fall and investment falls.Which of the following could explain these changes?

Which of the following counts as part of the supply of loanable funds?

If the government instituted an investment tax credit,then which of the following would be higher in equilibrium?

According to the loanable funds model,which of the following events would result in higher interest rates and greater saving?

Which of the following events could explain a decrease in interest rates together with an increase in investment?

In the market for loanable funds,the interaction of the demand for,and supply of,loanable funds determines the equilibrium level of

Which of the following is included in the demand for loanable funds?

Which of the following events could explain an increase in interest rates together with an increase in investment?

Which of the following is correct?