Question 1

A budget deficit

Accepted Answer

The answer of A budget deficit
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Question 2

Which of the following could explain an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds?

Accepted Answer

An increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds can be explained by a leftward shift in the supply of loanable funds. This shift indicates that at any given interest rate, there are fewer loanable funds available, which drives up the interest rate due to increased scarcity, while the quantity of loanable funds decreases because there is less supply available.

Question 3

Suppose a country has only a sales tax. Now suppose it replaces the sales tax with an income tax that includes a tax on interest income. This would make equilibrium

Accepted Answer

Taxing interest income reduces the after-tax return to saving, leading to a decrease in the supply of loanable funds. This results in higher equilibrium interest rates and a lower equilibrium quantity of loanable funds.

Question 4

Figure 26-1 The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds curves. -Refer to Figure 26-1. Which of the following events would shift the supply curve from S₁ to S₂?

Accepted Answer

An increase in household savings would increase the supply of loanable funds, shifting the supply curve from S1 to S2.

Question 5

Suppose the U.S. offered a tax credit for firms that built new factories in the U.S. Then the

Accepted Answer

The tax credit incentivizes firms to build new factories, increasing their demand for loans to finance these projects. This increased demand for loanable funds shifts the demand curve rightward, leading to a shortage of loanable funds at the original interest rate, as the quantity demanded exceeds the quantity supplied at that rate.

Question 6

What would happen, all else equal, in the market for loanable funds if the government were to decrease the tax rate on interest income?

Accepted Answer

Decreasing the tax rate on interest income makes saving more attractive because savers get to keep more of their interest earnings. This increases the supply of loanable funds, leading to a lower interest rate and an increase in the equilibrium quantity of loanable funds as more people are willing to lend their money.

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

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 9

Crowding out occurs when investment declines because a budget

Accepted Answer

Crowding out occurs when a government budget deficit drives up interest rates, which in turn leads to reduced investment spending by the private sector.

Question 10

Which of the following would necessarily create a surplus at the original equilibrium interest rate in the loanable funds market?

Accepted Answer

An increase in the supply of loanable funds or a decrease in the demand for loanable funds would lead to a surplus at the original equilibrium interest rate because there would be more funds available than are demanded at that rate.

Question 11

Figure 26-2 The figure depicts a supply-of-loanable-funds curve and two demand-for-loanable-funds curves. -Refer to Figure 26-2. Which of the following events would shift the demand curve from D₁ to D₂?

Accepted Answer

Firms becoming optimistic about the future and planning to increase their purchases of new equipment and construction of new factories would lead to an increase in demand for loanable funds, shifting the demand curve to the right.

Question 12

Figure 26-1
The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds curves. 
-Refer to Figure 26-1. What is measured along the vertical axis of the graph?

Accepted Answer

The vertical axis of a graph typically measures the interest rate when discussing investment and saving in economic models.

Question 13

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

Accepted Answer

An investment tax credit increases the incentive for firms to invest, which raises the demand for loanable funds. This increase in demand leads to a higher equilibrium interest rate and encourages more saving.

Question 14

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

Accepted Answer

Bank deposits and purchases of bonds both contribute to the supply of loanable funds. Bank deposits increase the funds available for banks to lend out, while purchasing bonds provides capital to entities that issue bonds, effectively lending them money.

Question 15

In 2002 mortgage rates fell and mortgage lending increased. Which of the following could explain both of these changes?

Accepted Answer

When the supply of loanable funds shifts rightward, it means there is an increase in the amount of money available for lending. This increase in supply leads to a decrease in the interest rates (in this case, mortgage rates), making borrowing cheaper and thus increasing mortgage lending.

Question 16

Figure 26-2
The figure depicts a supply-of-loanable-funds curve and two demand-for-loanable-funds curves. 
-Refer to Figure 26-2. What is measured along the horizontal axis of the graph?

Accepted Answer

The horizontal axis of a graph depicting the loanable funds market typically measures the quantity of loanable funds.

Question 17

If the nominal interest rate is 8 percent and the inflation rate is 3 percent, then the real interest rate is

Accepted Answer

The real interest rate can be calculated using the formula: real interest rate = nominal interest rate - inflation rate. Therefore, 8% - 3% = 5%.

Question 18

If the demand for loanable funds shifts to the left, then the equilibrium interest rate

Accepted Answer

A leftward shift in the demand for loanable funds indicates a decrease in the demand for loans. This decrease in demand leads to a lower equilibrium interest rate and a smaller quantity of loanable funds being exchanged in the market.

Question 19

Figure 26-3 The figure shows two demand-for-loanable-funds curves and two supply-of-loanable-funds curves. -Refer to Figure 26-3. A shift of the demand curve from D₁ to D₂ is called

Accepted Answer

A shift of the demand curve for loanable funds from one position to another represents a change in the demand itself, not just a change in the quantity demanded. An increase in demand is depicted by a rightward shift of the demand curve.

Question 20

A larger budget deficit

Accepted Answer

A larger budget deficit typically leads to higher interest rates because the government needs to borrow more from the private sector, which in turn reduces the amount of funds available for private investment. This scenario increases the cost of borrowing (interest rates) and consequently reduces investment.

Quiz 26: Saving, Investment, and the Financial System