Question 1

The supply of loanable funds in the U.S.is partly determined by the monetary policy implemented by the Federal Reserve System.

Accepted Answer

The monetary policy implemented by the Federal Reserve System can affect the supply of loanable funds in the U.S. through its influence on interest rates and money supply.

Question 2

The equilibrium interest rate
A)equates the aggregate demand for funds with the aggregate supply of loanable funds.
B)equates the elasticity of the aggregate demand and supply for loanable funds.
C)decreases as the aggregate supply of loanable funds decreases.
D)increases as the aggregate demand for loanable funds decreases.

Accepted Answer

The equilibrium interest rate is the interest rate at which the aggregate demand for funds is equal to the aggregate supply of loanable funds. At this point, borrowers are willing to borrow funds at the prevailing interest rate, and lenders are willing to lend funds at the same interest rate. Therefore, the equilibrium interest rate equates the demand for funds with the supply of loanable funds. Choices B, C, and D are incorrect as they do not define the equilibrium interest rate accurately.

Question 3

For a given set of foreign interest rates, the quantity of U.S.loanable funds demanded by foreign governments or firms will be ____ U.S.interest rates.
A)positively related to
B)inversely related to
C)unrelated to
D)none of the above

Accepted Answer

Other things being equal, if foreign interest rates are higher than U.S. interest rates, foreign governments and firms will demand fewer U.S. loanable funds because they can obtain funds at a lower cost from their own financial markets. Conversely, if U.S. interest rates are higher than foreign interest rates, foreign governments and firms may find it advantageous to borrow from U.S. financial markets, thus increasing the demand for U.S. loanable funds. Therefore, the quantity of U.S. loanable funds demanded by foreign governments and firms is inversely related to U.S. interest rates.

Question 4

The quantity of loanable funds supplied is normally
A)highly interest elastic.
B)more interest elastic than the demand for loanable funds.
C)less interest elastic than the demand for loanable funds.
D)equally interest elastic as the demand for loanable funds.
E)A and B

Accepted Answer

The quantity of loanable funds supplied is less interest elastic than the demand for loanable funds. This is because savers tend to have fixed savings plans and are less responsive to changes in interest rates compared to borrowers who may adjust their borrowing plans in response to changes in interest rates. Therefore, the supply of loanable funds is relatively less affected by changes in interest rates.

Question 5

The required return to implement a given business project will be ____ if interest rates are lower.This implies that businesses will demand a ____ quantity of loanable funds when interest rates are lower.
A)greater; lower
B)lower; greater
C)lower; lower
D)greater; greater

Accepted Answer

When interest rates are lower, the required return to implement a business project will be lower as well. This means businesses will demand a greater quantity of loanable funds, as it is cheaper for them to borrow money. Therefore, choice B correctly identifies that the required return will be lower and the demand for loanable funds will be greater when interest rates are lower.

Question 6

The demand for funds resulting from business investment in short-term assets is ____ related to the number of projects implemented, and is therefore ____ related to the interest rate.
A)inversely; positively
B)positively; inversely
C)inversely; inversely
D)positively; positively

Accepted Answer

The demand for funds resulting from business investment in short-term assets is positively related to the number of projects implemented, meaning that as the number of projects increases, so does the demand for funds. However, it is inversely related to the interest rate, meaning that as the interest rate increases, the demand for funds decreases. This is because a higher interest rate increases the cost of borrowing, making it less attractive to businesses to borrow funds to invest in short-term assets.

Question 7

The level of installment debt as a percentage of disposable income is generally ____ during recessionary periods.
A)higher
B)lower
C)zero
D)negative

Accepted Answer

During recessionary periods, people tend to spend less and save more, resulting in lower levels of installment debt as a percentage of disposable income.

Question 8

At any given point in time, households would demand a ____ quantity of loanable funds at ____ rates of interest.
A)greater; higher
B)greater; lower
C)smaller; lower
D)none of the above

Accepted Answer

When interest rates are lower, households are more likely to demand a greater quantity of loanable funds as the cost of borrowing is lower. When interest rates are higher, households are less likely to demand as much as the cost of borrowing is higher.

Question 9

If economic conditions become less favorable
A)expected cash flows on various projects will increase.
B)more proposed projects will have expected returns greater than the hurdle rate.
C)there would be additional acceptable business projects.
D)there would be a decreased demand by business for loanable funds.

Accepted Answer

If economic conditions become less favorable, businesses may become hesitant to take on new projects or investments, leading to a decreased demand for loanable funds. This decrease in demand could result in lower interest rates or a decrease in the availability of funds for borrowing. Options A, B, and C all suggest an increase in potential projects or returns, which would not necessarily be the case in a less favorable economic climate.

Question 10

Which of the following is likely to cause a decrease in the equilibrium U.S.interest rate, other things being equal?
A)a decrease in savings by foreign savers
B)an increase in inflation
C)pessimistic economic projections that cause businesses to reduce expansion plans
D)a decrease in savings by U.S.households

Accepted Answer

The answer of Which of the following is likely to...

Question 11

According to the loanable funds theory, market interest rates are determined by the factors that control the supply of and demand for loanable funds.

Accepted Answer

According to the loanable funds theory, market interest rates are determined by the supply of and demand for loanable funds. As the supply of funds increases, interest rates tend to decrease, and as the demand for funds increases, interest rates tend to increase. Therefore, the theory emphasizes the importance of the supply and demand dynamics in the loanable funds market in determining interest rates.

Question 12

The federal government demand for loanable funds is ____.If the budget deficit was expected to increase, the federal government demand for loanable funds would ____.
A)interest elastic; decrease
B)interest elastic; increase
C)interest inelastic; increase
D)interest inelastic; decrease

Accepted Answer

The answer of The federal government demand for loanable funds...

Question 13

The Fisher effect states that the
A)nominal interest rate equals the expected inflation rate plus the real rate of interest.
B)nominal interest rate equals the real rate of interest minus the expected inflation rate.
C)real rate of interest equals the nominal interest rate plus the expected inflation rate.
D)expected inflation rate equals the nominal interest rate plus the real rate of interest.

Accepted Answer

The Fisher effect states that the nominal interest rate equals the expected inflation rate plus the real rate of interest. This means that the nominal interest rate (the rate you see advertised) is made up of two components: the real rate of interest (the compensation you receive for lending money) and the expected inflation rate (the compensation you receive for the loss in buying power due to inflation).

Question 14

As a result of more favorable economic conditions, there is a(n) ____ demand for loanable funds, causing an ____ shift in the demand curve.
A)decreased; inward
B)decreased; outward
C)increased; outward
D)increased; inward

Accepted Answer

When economic conditions are favorable, there is an increased demand for loanable funds as individuals and businesses seek to invest in new projects and expand their operations. This causes an outward shift in the demand curve, as the quantity of loanable funds demanded increases at every interest rate.

Question 15

Other things being equal, foreign governments and corporations would demand ____ U.S.funds if their local interest rates were lower than U.S.rates.Therefore, for a given set of foreign interest rates, foreign demand for U.S.funds is ____ related to U.S.interest rates.
A)less; inversely
B)more; positively
C)less; positively
D)more; inversely

Accepted Answer

If foreign interest rates are lower than U.S. interest rates, foreign investors will demand less U.S. funds because they can earn a higher return by investing locally. This means that foreign demand for U.S. funds is inversely related to U.S. interest rates - as U.S. rates increase, foreign demand for U.S. funds will decrease.

Question 16

The equilibrium interest rate should
A)fall when the aggregate supply funds exceeds aggregate demand for funds.
B)rise when the aggregate supply of funds exceeds aggregate demand for funds.
C)fall when the aggregate demand for funds exceeds aggregate supply of funds.
D)rise when aggregate demand for funds equals aggregate supply of funds.
E)B and C

Accepted Answer

The answer of The equilibrium interest rate should
A)fall when the...

Question 17

Businesses demand loanable funds to
A)finance installment debt.
B)subsidize other companies.
C)invest in fixed and short-term assets.
D)none of the above

Accepted Answer

Businesses demand loanable funds to invest in both fixed and short-term assets, such as infrastructure, equipment, and inventory. Financing installment debt is a personal finance concept, and subsidizing other companies falls under the realm of philanthropy or corporate social responsibility, rather than core business operations.

Question 18

The ____ sector is the largest supplier of loanable funds.
A)household
B)government
C)business
D)none of the above

Accepted Answer

The answer of The ____ sector is the largest supplier...

Question 19

If a strong economy allows for a large ____ in households income, the supply curve will shift ____.
A)decrease; outward
B)increase; inward
C)increase; outward
D)none of the above

Accepted Answer

A strong economy allows for an increase in households income, which means they have more money to spend on goods and services. This leads to increased demand for goods and services, causing the supply curve to shift outwards. Therefore, choice C is the correct answer.

Question 20

If interest rates are ____, ____ projects will have positive NPVs.
A)higher; more
B)lower; more
C)lower; no
D)none of the above

Accepted Answer

When interest rates are lower, the discount rate used to calculate NPV is lower as well, resulting in a higher present value of future cash flows. Therefore, more projects will have positive NPVs.

Quiz 2: Determination of Interest Rates

The supply of loanable funds in the U.S.is partly determined by the monetary policy implemented by the Federal Reserve System.

The equilibrium interest rate

For a given set of foreign interest rates, the quantity of U.S.loanable funds demanded by foreign governments or firms will be ____ U.S.interest rates.

The quantity of loanable funds supplied is normally

The required return to implement a given business project will be if interest rates are lower.This implies that businesses will demand a quantity of loanable funds when interest rates are lower.

The demand for funds resulting from business investment in short-term assets is related to the number of projects implemented, and is therefore related to the interest rate.

The level of installment debt as a percentage of disposable income is generally ____ during recessionary periods.

At any given point in time, households would demand a quantity of loanable funds at rates of interest.

If economic conditions become less favorable

Which of the following is likely to cause a decrease in the equilibrium U.S.interest rate, other things being equal?

According to the loanable funds theory, market interest rates are determined by the factors that control the supply of and demand for loanable funds.

The federal government demand for loanable funds is .If the budget deficit was expected to increase, the federal government demand for loanable funds would .

The Fisher effect states that the

As a result of more favorable economic conditions, there is a(n) demand for loanable funds, causing an shift in the demand curve.

Other things being equal, foreign governments and corporations would demand U.S.funds if their local interest rates were lower than U.S.rates.Therefore, for a given set of foreign interest rates, foreign demand for U.S.funds is related to U.S.interest rates.

The equilibrium interest rate should

Businesses demand loanable funds to

The ____ sector is the largest supplier of loanable funds.

If a strong economy allows for a large in households income, the supply curve will shift .

If interest rates are , projects will have positive NPVs.