Question 1

A ____ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an ____ shift in the demand schedule.
A)higher; inward
B)higher; outward
C)lower; outward
D)None of these are correct.

Accepted Answer

A higher federal government deficit increases the quantity of loanable funds demanded because the government needs to borrow more to finance its deficit, leading to an outward shift in the demand schedule for loanable funds.

Question 2

If economic expansion is expected to decrease, the demand for loanable funds should ____ and interest rates should ____. ​
A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Accepted Answer

When economic expansion is expected to decrease, the demand for loanable funds decreases because businesses and consumers are less likely to borrow for investment and spending. This decrease in demand typically leads to lower interest rates as lenders try to attract borrowers.

Question 3

If the federal government reduces its budget deficit, this causes a(n)____ in the supply of loanable funds and a(n)____ in the demand for loanable funds. ​
A)increase; no change
B)decrease; no change
C)no change; increase
D)no change; decrease

Accepted Answer

The answer of If the federal government reduces its budget...

Question 4

When Japanese interest rates rise, and exchange rate expectations remain unchanged, the most likely effect is that the supply of loanable funds provided by Japanese investors to the United States will ____, and U.S. interest rates will ____.
A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase

Accepted Answer

When Japanese interest rates rise, Japanese investors are more likely to invest domestically rather than in the United States, decreasing the supply of loanable funds to the U.S. This decrease in supply leads to higher U.S. interest rates.

Question 5

Which of the following will probably NOT result in an increase in the business demand for loanable funds?
A)an increase in economic growth
B)a reduction in interest rates on business loans
C)a recession
D)None of these are correct.

Accepted Answer

A recession typically leads to a decrease in business activity, reducing the demand for loanable funds as businesses are less likely to invest in expansion or new projects during economic downturns.

Question 6

What is the basis of the relationship between the Fisher effect and the loanable funds theory?
A)savers' desire to maintain the existing real rate of interest
B)borrowers' desire to achieve a positive real rate of interest
C)savers' desire to achieve a negative real rate of interest
D)borrowers' desire to achieve a positive real rate of interest AND savers' desire to achieve a negative real rate of interest

Accepted Answer

The Fisher effect posits that the real interest rate is stable over time, and changes in the expected inflation rate will be fully reflected in the nominal interest rate. The loanable funds theory, which deals with the market where savers supply funds for loans to borrowers, is connected to the Fisher effect through savers' desire to maintain a real rate of interest that compensates for inflation, ensuring their savings do not lose value over time.

Question 7

Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. securities and increase their holdings of securities in their own countries. This should cause the supply of loanable funds in the United States to______ and should place ____ pressure on U.S. interest rates.
A)decrease; upward
B)decrease; downward
C)increase; downward
D)increase; upward

Accepted Answer

When foreign investors decrease their holdings of U.S. securities, they are essentially pulling their capital out of the U.S. financial markets. This reduces the overall supply of loanable funds in the United States. With less supply of loanable funds, the price of borrowing those funds, which is the interest rate, tends to increase. Therefore, there is upward pressure on U.S. interest rates.

Question 8

If the aggregate demand for loanable funds increases without a corresponding ____ in aggregate supply, there will be a ____ of loanable funds. ​
A)increase; surplus
B)increase; shortage
C)decrease; surplus
D)decrease; shortage

Accepted Answer

When the demand for loanable funds increases without a corresponding increase in supply, it leads to a shortage because the demand exceeds the available supply.

Question 9

The federal government's _________ determines the budget deficit and therefore determines the government's demand for loanable funds.
A)monetary policy
B)fiscal policy
C)congressional policy
D)economic policy

Accepted Answer

The federal government's fiscal policy, which involves government spending and taxation, directly determines the budget deficit. When government spending exceeds its revenue, a budget deficit occurs, leading to an increased demand for loanable funds to finance the deficit.

Question 10

When there are expectations of higher inflation in the future, we would typically expect the supply of loanable funds to ____ and the demand for loanable funds to ____. ​
A)increase; decrease
B)increase; increase
C)decrease; increase
D)decrease; decrease

Accepted Answer

When expectations of higher inflation in the future arise, lenders demand higher interest rates to compensate for the decreased purchasing power of future payments, leading to a decrease in the supply of loanable funds. Borrowers, anticipating higher costs in the future, may seek to borrow more before rates rise, increasing the demand for loanable funds.

Question 11

Which of the following is least likely to affect household demand for loanable funds?
A)a decrease in tax rates
B)an increase in interest rates
C)a reduction in available projects with an expected high rate of return
D)All of these are equally likely to affect household demand for loanable funds.

Accepted Answer

Household demand for loanable funds is primarily influenced by interest rates and tax rates, as these directly affect borrowing costs and disposable income. A reduction in available projects with a high rate of return is more relevant to business investment decisions rather than household borrowing.

Question 12

Which of the following is NOT true regarding foreign interest rates?
A)The large flow of funds between countries causes interest rates in any given country to become more susceptible to interest rate movements in other countries.
B)If a foreign country is experiencing high inflation, its equilibrium interest rate is likely to be higher than the U.S. equilibrium interest rate.
C)An increase in a foreign country's interest rates will likely decrease demand for U.S. loanable funds by businesses in that country.
D)All of these are true regarding foreign interest rates.

Accepted Answer

An increase in a foreign country's interest rates will likely increase, not decrease, the demand for U.S. loanable funds by businesses in that country, as they seek cheaper borrowing options.

Question 13

If the economy weakens, there is ____ pressure on interest rates. If the Federal Reserve increases the money supply there is ____ pressure on interest rates (assume that inflationary expectations are not affected). ​
A)upward; upward
B)upward; downward
C)downward; upward
D)downward; downward

Accepted Answer

When the economy weakens, there is typically downward pressure on interest rates as the central bank may lower rates to stimulate economic activity. Similarly, if the Federal Reserve increases the money supply, it generally leads to lower interest rates as more money is available for lending.

Question 14

Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. securities. This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S. interest rates. ​
A)decrease; upward
B)decrease; downward
C)increase; downward
D)increase; upward

Accepted Answer

When foreign investors increase their holdings of U.S. securities, they are essentially buying more U.S. assets, which means they are supplying more funds to the U.S. financial markets. This increase in the supply of loanable funds tends to lower interest rates, as there is more money available for borrowing.

Question 15

If inflation turns out to be lower than expected ​
A)savers benefit.
B)borrowers benefit while savers are not affected.
C)savers and borrowers are equally affected.
D)savers are adversely affected but borrowers benefit.

Accepted Answer

When inflation is lower than expected, the real value of money increases, benefiting savers because the purchasing power of their saved money is higher than they anticipated.

Question 16

If the federal government needs to borrow additional funds, this borrowing reflects a(n)____ in the supply of loanable funds and a(n)____ in the demand for loanable funds. ​
A)increase; no change
B)decrease; no change
C)no change; increase
D)no change; decrease

Accepted Answer

When the federal government needs to borrow additional funds, it does not change the supply of loanable funds but increases the demand for these funds, as it is seeking to borrow more from the market.

Question 17

Canada and the United States are major trading partners. If Canada experiences a major increase in economic growth, that could place ____ pressure on Canadian interest rates and ____ pressure on U.S. interest rates. ​
A)upward; upward
B)upward; downward
C)downward; downward
D)downward; upward

Accepted Answer

Increased economic growth in Canada could lead to higher demand for borrowing, putting upward pressure on Canadian interest rates. The increased economic activity could also lead to more demand for U.S. goods, potentially increasing U.S. economic growth and putting upward pressure on U.S. interest rates as well.

Question 18

If investors shift funds from stocks into bank deposits, this ____ the supply of loanable funds and places ____ pressure on interest rates. ​
A)increases; upward
B)increases; downward
C)decreases; downward
D)decreases; upward

Accepted Answer

When investors move their money from stocks to bank deposits, the amount of money available for banks to lend out increases. This increase in the supply of loanable funds typically leads to a decrease in interest rates, as banks have more funds to lend and may reduce rates to attract borrowers.

Question 19

The federal government's spending policies are generally thought to be _________ interest rates, but municipal governments' spending is somewhat ________ interest rates. ​
A)independent of; sensitive to
B)sensitive to; independent of
C)inversely rated to; positively related to
D)positively related to; inversely related to

Accepted Answer

Federal government spending is typically independent of interest rates because it can finance deficits through borrowing. Municipal governments, however, are more sensitive to interest rates as they often rely on bonds for funding, which are affected by interest rate changes.

Question 20

If the real interest rate is expected to become negative, then the purchasing power of savings would be ____, as the inflation rate is expected to be ____ the existing nominal interest rate. ​
A)decreasing; less than
B)decreasing; greater than
C)increasing; greater than
D)increasing; less than

Accepted Answer

When the real interest rate is expected to become negative, it means that the inflation rate is higher than the nominal interest rate, leading to a decrease in the purchasing power of savings.

Quiz 2: Determination of Interest Rates

A federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an shift in the demand schedule.

If economic expansion is expected to decrease, the demand for loanable funds should and interest rates should .

If the federal government reduces its budget deficit, this causes a(n) in the supply of loanable funds and a(n) in the demand for loanable funds.

When Japanese interest rates rise, and exchange rate expectations remain unchanged, the most likely effect is that the supply of loanable funds provided by Japanese investors to the United States will , and U.S. interest rates will .

Which of the following will probably NOT result in an increase in the business demand for loanable funds?

What is the basis of the relationship between the Fisher effect and the loanable funds theory?

If the aggregate demand for loanable funds increases without a corresponding in aggregate supply, there will be a of loanable funds.

The federal government's _________ determines the budget deficit and therefore determines the government's demand for loanable funds.

When there are expectations of higher inflation in the future, we would typically expect the supply of loanable funds to and the demand for loanable funds to .

Which of the following is least likely to affect household demand for loanable funds?

Which of the following is NOT true regarding foreign interest rates?

If the economy weakens, there is pressure on interest rates. If the Federal Reserve increases the money supply there is pressure on interest rates (assume that inflationary expectations are not affected) .

Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. securities. This should cause the supply of loanable funds in the United States to and should place pressure on U.S. interest rates.

If inflation turns out to be lower than expected

If the federal government needs to borrow additional funds, this borrowing reflects a(n) in the supply of loanable funds and a(n) in the demand for loanable funds.

Canada and the United States are major trading partners. If Canada experiences a major increase in economic growth, that could place pressure on Canadian interest rates and pressure on U.S. interest rates.

If investors shift funds from stocks into bank deposits, this the supply of loanable funds and places pressure on interest rates.

The federal government's spending policies are generally thought to be _ interest rates, but municipal governments' spending is somewhat interest rates.

If the real interest rate is expected to become negative, then the purchasing power of savings would be , as the inflation rate is expected to be the existing nominal interest rate.

Quiz 2: Determination of Interest Rates

A ____ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an ____ shift in the demand schedule.

If economic expansion is expected to decrease, the demand for loanable funds should ____ and interest rates should ____. ​

If the federal government reduces its budget deficit, this causes a(n) ____ in the supply of loanable funds and a(n) ____ in the demand for loanable funds. ​

When Japanese interest rates rise, and exchange rate expectations remain unchanged, the most likely effect is that the supply of loanable funds provided by Japanese investors to the United States will ____, and U.S. interest rates will ____.

Which of the following will probably NOT result in an increase in the business demand for loanable funds?

What is the basis of the relationship between the Fisher effect and the loanable funds theory?

If the aggregate demand for loanable funds increases without a corresponding ____ in aggregate supply, there will be a ____ of loanable funds. ​

The federal government's _________ determines the budget deficit and therefore determines the government's demand for loanable funds.

When there are expectations of higher inflation in the future, we would typically expect the supply of loanable funds to ____ and the demand for loanable funds to ____. ​

Which of the following is least likely to affect household demand for loanable funds?

Which of the following is NOT true regarding foreign interest rates?

If the economy weakens, there is ____ pressure on interest rates. If the Federal Reserve increases the money supply there is ____ pressure on interest rates (assume that inflationary expectations are not affected) . ​

Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. securities. This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S. interest rates. ​

If inflation turns out to be lower than expected ​

If the federal government needs to borrow additional funds, this borrowing reflects a(n) ____ in the supply of loanable funds and a(n) ____ in the demand for loanable funds. ​

Canada and the United States are major trading partners. If Canada experiences a major increase in economic growth, that could place ____ pressure on Canadian interest rates and ____ pressure on U.S. interest rates. ​

If investors shift funds from stocks into bank deposits, this ____ the supply of loanable funds and places ____ pressure on interest rates. ​

The federal government's spending policies are generally thought to be _________ interest rates, but municipal governments' spending is somewhat ________ interest rates. ​

If the real interest rate is expected to become negative, then the purchasing power of savings would be ____, as the inflation rate is expected to be ____ the existing nominal interest rate. ​