Question 1

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 2

The source of the supply of loanable funds is

Accepted Answer

The source of the supply of loanable funds is savings, as individuals, firms and governments save a portion of their income. The source of the demand for loanable funds is investment, as firms and individuals borrow funds to finance productive investments. Therefore, the best choice is A which correctly identifies the source of supply and demand for loanable funds.

Question 3

Which of the following statements is not correct?

Accepted Answer

The statement "The ratio of debt to GDP in the United States has always been less than one" is not correct. In fact, the ratio of debt to GDP in the United States has often been greater than one, particularly in times of war or economic recession.

Question 4

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 loanable funds market determines the real interest rate, which is the price of borrowing money adjusted for inflation. The demand for loanable funds represents the demand for investment, while the supply of loanable funds represents the supply of savings. The equilibrium level is where the demand and supply curves intersect, indicating the quantity of loanable funds (savings and investment) and the real interest rate that balance each other out. The inflation rate, gross domestic product, and nominal interest rate are all influenced by factors outside of the loanable funds market.

Question 5

The ratio of debt to GDP in the United States

Accepted Answer

Debt to GDP ratio in the US fell during the late 1990s, when the country experienced a period of economic growth and budget surpluses. During wars, the ratio tends to increase due to increased government spending on defense and other war-related activities. The debt to GDP ratio also increased during the decade that began in 2000 due to factors such as tax cuts, increased government spending, and the 2008 financial crisis.

Question 6

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 for lenders to loan out, therefore they are part of the supply of loanable funds.

Question 7

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 8

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 businesses to invest more, which could lead to an increase in investment. However, this increased demand for investment funds could also lead to an increase in interest rates as lenders may seek higher returns on their funds. Government deficits and tax policies do not necessarily have a direct impact on investment and interest rates.

Question 9

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 10

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

Accepted Answer

The answer of According to the loanable funds model,which of...

Question 11

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, this may lead to an increase in interest rates due to a decrease in supply of loanable funds. The decrease in investment may occur due to higher interest rates which lead to higher borrowing costs and makes investment projects less attractive. The decrease in investment could also be due to a decrease in investor confidence caused by the budget deficit. B and C are incorrect as they suggest policies that would likely increase investment, not decrease it.

Question 12

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 13

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

Accepted Answer

Repealing an investment tax credit would make it more expensive for businesses to invest, causing a decrease in investment. Falling interest rates signal that borrowing is cheaper, which would usually lead to an increase in investment. Therefore, the offsetting effect of the investment tax credit repeal would lead to a decrease in investment overall. The other options given do not directly relate to changes in investment and interest rates.

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 firms to invest more, which would increase the demand for loanable funds, thereby increasing the interest rate. However, the tax credit would also increase the after-tax return on investment, thus increasing the incentive to save more. This increase in savings would supply more loanable funds, which would lower the equilibrium interest rate. Therefore, both saving and the interest rate would be higher in equilibrium, but the impact on saving would be greater.

Question 15

A policy that induces people to save more shifts

Accepted Answer

The answer of A policy that induces people to save...

Question 16

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, it means that increases in interest rates have less of an effect on the amount of funds demanded. Therefore, when the supply of loanable funds increases due to tax law changes, the demand for funds will still remain relatively high, resulting in a smaller increase in investment. Conversely, when the supply of funds is more elastic, an increase in supply will result in larger decreases in interest rates, which will increase investment to a greater extent.

Question 17

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 18

Which of the following is correct?

Accepted Answer

The answer of Which of the following is correct?
...

Question 19

If the budget deficit increases then

Accepted Answer

When the budget deficit increases, the government needs to borrow more money which increases the demand for loanable funds. This causes a decrease in the supply of loanable funds, leading to an increase in the interest rate. At the same time, households and firms may reduce their saving because they are uncertain about future tax rates or government spending. This reduction in saving further increases the interest rate.

Question 20

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

Accepted Answer

In the loanable funds market model, "loanable funds" are defined as the flow of resources available to fund private investment. Therefore, a government budget deficit, which reduces the supply of loanable funds, affects the supply side of the market rather than the demand side.

Quiz 26: Saving,investment,and the Financial System