Question 1

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E₁.If the government then institutes a policy that encourages individuals to decrease the fraction of their income that they consume,

Accepted Answer

The policy encourages individuals to save more, which increases the supply of loanable funds. This leads to a lower equilibrium interest rate and an increase in the amount of investment. The equilibrium point moves to the right along the supply curve, resulting in a new equilibrium point at ES2U2B12S2U2B0.

Question 2

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at E₁.A shift of the aggregate investment demand curve from I₁ to I₂,all other things constant,would

Accepted Answer

A shift of the aggregate investment demand curve to the right indicates an increase in the demand for financial capital, which would lead to an increase in the equilibrium interest rate in order to maintain equilibrium in the market for financial capital. Therefore, the answer is D, increase the equilibrium interest rate. The supply of saving curve and the technology of capital use are not directly affected by the shift in the investment demand curve. The marginal product of capital is not mentioned and hence, irrelevant to the answer.

Question 3

Which of the following best explains why there is a positive relationship between the interest rate and the supply of households' savings to the financial capital market?

Accepted Answer

When interest rates increase, the opportunity cost (in terms of foregone interest earnings) of current spending also increases. As a result, households are more likely to save their income instead of spending it. Therefore, an increase in the interest rate leads to an increase in the supply of households' savings to the financial capital market.

Question 4

The Canadian government introduced the Tax-Free Savings Account (TFSA)in 2009,which allows Canadians to earn tax-free investment returns on a limited amount of savings each year.In theory,and all else remaining equal,what do we expect the effect of such a policy to be on the market for financial capital?

Accepted Answer

The introduction of the TFSA increases the incentive for individuals to save, shifting the supply of savings curve to the right. This results in a lower equilibrium interest rate and an increase in investment.

Question 5

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E₁.If the marginal product of capital increases,all other things being equal,the

Accepted Answer

When the marginal product of capital increases, it makes investment more attractive, leading to an increase in investment demand. This shifts the investment demand curve to the right, resulting in a new equilibrium at E₄.

Question 6

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E₁.If the government then institutes a policy that encourages individuals to increase their desired saving,

Accepted Answer

The policy that encourages individuals to increase their desired saving will shift the supply of loanable funds curve to the right, resulting in a new equilibrium point ES2U2B21S2U2B2 with a lower interest rate and a higher amount of investment. This is because the increased saving leads to more funds available for investment, driving down the cost of borrowing (interest rate) and increasing the quantity of investment.

Question 7

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E₁.If the government then institutes a policy that encourages firms to increase their desired investment,

Accepted Answer

When firms increase their desired investment, the demand for financial capital increases, leading to a higher equilibrium interest rate and an increase in the flow of investment and saving.

Question 8

Suppose that you lend me $100 for a year,and that I agree to pay you $110 at that time (principal plus interest).Over the intervening year,however,the average price of goods in the economy falls by 4%.The real rate of return that you will earn on your loan to me is therefore equal to

Accepted Answer

The nominal return is 10% ($110/$100 - 1). With a 4% deflation, the real return is 10% + 4% = 14%.

Question 9

The diagram below shows the market for financial capital for a closed economy.  FIGURE 15-3
-Refer to Figure 15-3.Suppose the current equilibrium in the market for financial capital is at point D.Which of the following events is likely to move the equilibrium to point A?

Accepted Answer

The answer of The diagram below shows the market for...

Question 10

The diagram below shows the market for financial capital for a closed economy.  FIGURE 15-3
-Refer to Figure 15-3.Suppose the current equilibrium in the market for financial capital is at point A.Which of the following events is likely to move the equilibrium to point D?

Accepted Answer

The answer of The diagram below shows the market for...

Question 11

Households' supply of financial capital is derived from

Accepted Answer

Households supply financial capital by saving a portion of their income, which can then be used for investment purposes. Therefore, their supply of financial capital is derived from their supply of saving.

Question 12

Suppose that you lend me $100 for a year,and that I agree to pay you $110 at the end of one year (principal plus interest).Over the intervening year,however,the average price of goods in the economy rises by 3%.The real rate of return that you will earn on your loan to me is therefore equal to

Accepted Answer

The nominal interest rate on the loan is 10% ($110 - $100 = $10 of interest). However, due to the inflation rate of 3%, the purchasing power of that $110 in one year will be equivalent to $110 / 1.03 = $106.80 in today's dollars.

The real rate of return on the loan is therefore ($106.80 - $100) / $100 = 6.8%, which when rounded to the nearest whole number is equal to 7%.

Therefore, the correct choice is B.

Question 13

The diagram below shows the market for financial capital for a closed economy.  FIGURE 15-3
-Refer to Figure 15-3.Suppose the current equilibrium in the market for financial capital is at point A.Which of the following events is likely to move the equilibrium to point B?

Accepted Answer

An increase in current household income would likely increase the supply of financial capital, shifting the equilibrium from point A to point B.

Question 14

Suppose the nominal interest rate is 10%.The rate of inflation has been 4% and is expected to continue at 4% in the future.The real interest rate,which determines the firm's decision to purchase capital,is therefore

Accepted Answer

Real interest rate = nominal interest rate - inflation rate
Real interest rate = 10% - 4%
Real interest rate = 6%

Question 15

Suppose you are working as an intern at a large financial firm with an annual salary of $30 000,but you are guaranteed a salary increase to $85 000 at the end of the internship.In general,we can expect that

Accepted Answer

In anticipation of a higher future income, individuals often reduce their current savings to smooth consumption over time, leading to a decrease in the supply of financial capital to the economy.

Question 16

FIGURE 15-2 -Refer to Figure 15-2.Suppose the economy begins at point E₁.If technology changes in a way that increases the marginal product of capital,which movement best depicts the change in equilibrium in the market for financial capital?

Accepted Answer

The answer of  FIGURE 15-2
-Refer to Figure 15-2.Suppose the...

Question 17

Consider the economy's upward-sloping supply of saving curve.An increase in the interest rate causes ________; an increase in current income causes ________.

Accepted Answer

An increase in the interest rate leads to a movement upward along the supply of saving curve as savers are incentivized to save more. An increase in current income shifts the curve to the right as people have more income to save.

Question 18

For the economy as a whole,the equilibrium interest rate is determined by

Accepted Answer

The equilibrium interest rate for the economy as a whole is determined by the intersection of the aggregate investment demand curve and the aggregate saving supply curve. In general, as the interest rate increases, the quantity of saving will increase and the quantity of investment will decrease, resulting in a point where the two curves intersect and the market is in equilibrium.

Question 19

The diagram below shows the market for financial capital for a closed economy.  FIGURE 15-3
-Refer to Figure 15-3.Suppose the current equilibrium in the market for financial capital is at point A.Which of the following events is likely to move the equilibrium to point C?

Accepted Answer

The answer of The diagram below shows the market for...

Question 20

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E₁.A shift of the aggregate saving supply curve from S₁ to S₂,all other things being equal,would

Accepted Answer

A shift from S1 to S2 indicates an increase in savings supply, which typically leads to a decrease in the equilibrium interest rate, assuming demand remains constant.

Quiz 15: Interest Rates and the Capital Market

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at E₁.A shift of the aggregate investment demand curve from I₁ to I₂,all other things constant,would

Which of the following best explains why there is a positive relationship between the interest rate and the supply of households' savings to the financial capital market?

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E₁.If the marginal product of capital increases,all other things being equal,the

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E₁.If the government then institutes a policy that encourages individuals to increase their desired saving,

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E₁.If the government then institutes a policy that encourages firms to increase their desired investment,

Suppose that you lend me $100 for a year,and that I agree to pay you $110 at that time (principal plus interest) .Over the intervening year,however,the average price of goods in the economy falls by 4%.The real rate of return that you will earn on your loan to me is therefore equal to

The diagram below shows the market for financial capital for a closed economy. FIGURE 15-3 -Refer to Figure 15-3.Suppose the current equilibrium in the market for financial capital is at point D.Which of the following events is likely to move the equilibrium to point A?

The diagram below shows the market for financial capital for a closed economy. FIGURE 15-3 -Refer to Figure 15-3.Suppose the current equilibrium in the market for financial capital is at point A.Which of the following events is likely to move the equilibrium to point D?

Households' supply of financial capital is derived from

Suppose that you lend me $100 for a year,and that I agree to pay you $110 at the end of one year (principal plus interest) .Over the intervening year,however,the average price of goods in the economy rises by 3%.The real rate of return that you will earn on your loan to me is therefore equal to

The diagram below shows the market for financial capital for a closed economy. FIGURE 15-3 -Refer to Figure 15-3.Suppose the current equilibrium in the market for financial capital is at point A.Which of the following events is likely to move the equilibrium to point B?

Suppose the nominal interest rate is 10%.The rate of inflation has been 4% and is expected to continue at 4% in the future.The real interest rate,which determines the firm's decision to purchase capital,is therefore

Suppose you are working as an intern at a large financial firm with an annual salary of $30 000,but you are guaranteed a salary increase to $85 000 at the end of the internship.In general,we can expect that

FIGURE 15-2 -Refer to Figure 15-2.Suppose the economy begins at point E₁.If technology changes in a way that increases the marginal product of capital,which movement best depicts the change in equilibrium in the market for financial capital?

Consider the economy's upward-sloping supply of saving curve.An increase in the interest rate causes ; an increase in current income causes .

For the economy as a whole,the equilibrium interest rate is determined by

The diagram below shows the market for financial capital for a closed economy. FIGURE 15-3 -Refer to Figure 15-3.Suppose the current equilibrium in the market for financial capital is at point A.Which of the following events is likely to move the equilibrium to point C?

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E₁.A shift of the aggregate saving supply curve from S₁ to S₂,all other things being equal,would

Quiz 15: Interest Rates and the Capital Market

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E1.If the government then institutes a policy that encourages individuals to decrease the fraction of their income that they consume,

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at E1.A shift of the aggregate investment demand curve from I1 to I2,all other things constant,would

Which of the following best explains why there is a positive relationship between the interest rate and the supply of households' savings to the financial capital market?

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E1.If the marginal product of capital increases,all other things being equal,the

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E1.If the government then institutes a policy that encourages individuals to increase their desired saving,

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E1.If the government then institutes a policy that encourages firms to increase their desired investment,

Suppose that you lend me $100 for a year,and that I agree to pay you $110 at that time (principal plus interest) .Over the intervening year,however,the average price of goods in the economy falls by 4%.The real rate of return that you will earn on your loan to me is therefore equal to

The diagram below shows the market for financial capital for a closed economy. FIGURE 15-3 -Refer to Figure 15-3.Suppose the current equilibrium in the market for financial capital is at point D.Which of the following events is likely to move the equilibrium to point A?

The diagram below shows the market for financial capital for a closed economy. FIGURE 15-3 -Refer to Figure 15-3.Suppose the current equilibrium in the market for financial capital is at point A.Which of the following events is likely to move the equilibrium to point D?

Households' supply of financial capital is derived from

Suppose that you lend me $100 for a year,and that I agree to pay you $110 at the end of one year (principal plus interest) .Over the intervening year,however,the average price of goods in the economy rises by 3%.The real rate of return that you will earn on your loan to me is therefore equal to

The diagram below shows the market for financial capital for a closed economy. FIGURE 15-3 -Refer to Figure 15-3.Suppose the current equilibrium in the market for financial capital is at point A.Which of the following events is likely to move the equilibrium to point B?

Suppose the nominal interest rate is 10%.The rate of inflation has been 4% and is expected to continue at 4% in the future.The real interest rate,which determines the firm's decision to purchase capital,is therefore

Suppose you are working as an intern at a large financial firm with an annual salary of $30 000,but you are guaranteed a salary increase to $85 000 at the end of the internship.In general,we can expect that

FIGURE 15-2 -Refer to Figure 15-2.Suppose the economy begins at point E1.If technology changes in a way that increases the marginal product of capital,which movement best depicts the change in equilibrium in the market for financial capital?

Consider the economy's upward-sloping supply of saving curve.An increase in the interest rate causes ________; an increase in current income causes ________.

For the economy as a whole,the equilibrium interest rate is determined by

The diagram below shows the market for financial capital for a closed economy. FIGURE 15-3 -Refer to Figure 15-3.Suppose the current equilibrium in the market for financial capital is at point A.Which of the following events is likely to move the equilibrium to point C?

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E1.A shift of the aggregate saving supply curve from S1 to S2,all other things being equal,would

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at E₁.A shift of the aggregate investment demand curve from I₁ to I₂,all other things constant,would

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E₁.If the marginal product of capital increases,all other things being equal,the

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E₁.If the government then institutes a policy that encourages individuals to increase their desired saving,

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E₁.If the government then institutes a policy that encourages firms to increase their desired investment,

FIGURE 15-2 -Refer to Figure 15-2.Suppose the economy begins at point E₁.If technology changes in a way that increases the marginal product of capital,which movement best depicts the change in equilibrium in the market for financial capital?

Consider the economy's upward-sloping supply of saving curve.An increase in the interest rate causes ; an increase in current income causes .

FIGURE 15-2 -Refer to Figure 15-2.The market for financial capital is initially in equilibrium at point E₁.A shift of the aggregate saving supply curve from S₁ to S₂,all other things being equal,would