Question 1

Figure 26-5. Figure 26-5 shows the loanable funds market for a closed economy. 
-Refer to Figure 26-5. Starting at point A, a change in tax laws that encouraged households to save more would likely cause
A) the quantity of loanable funds traded to increase to $125 and the interest rate fall to 5% (point D).
B) the quantity of loanable funds traded to increase to $125 and the interest rate to rise to 7% (point C).
C) the quantity of loanable funds traded to decrease to $75 and the interest rate to fall to 5% (point B).
D) the quantity of loanable funds traded to decrease to $75 and the interest rate to rise to 7% (point E).

Accepted Answer

The answer of Figure 26-5. Figure 26-5 shows the loanable...

Question 2

Kroger's grocery chain wants to finance the purchase of a new warehouse. It decides to sell bonds.
A) Kroger's plans to use equity financing and its action is part of the demand for loanable funds.
B) Kroger's plans to use equity financing and its action is part of the supply of loanable funds.
C) Kroger's plans to use debt financing and its action is part of the demand for loanable funds.
D) Kroger's plans to use debt financing and its action is part of the supply of loanable funds.

Accepted Answer

Kroger's plans to use debt financing by selling bonds, which means it is part of the demand for loanable funds. The demand for loanable funds represents the borrowers who are seeking to borrow money through debt financing.

Question 3

Other things the same, an increase in taxes with no change in government purchases makes national saving
A) rise. The supply of loanable funds shifts right.
B) rise. The demand for loanable funds shifts right.
C) fall. The supply of loanable funds shifts left.
D) fall. The demand for loanable funds shifts left.

Accepted Answer

The answer of Other things the same, an increase in...

Question 4

Figure 26-5. Figure 26-5 shows the loanable funds market for a closed economy. 
-Refer to Figure 26-5. Starting at point A, the enactment of an investment tax credit would likely cause
A) the quantity of loanable funds traded to increase to $125 and the interest rate to rise to 7% (point C).
B) the quantity of loanable funds traded to decrease to $75 and the interest rate to fall to 5% (point B).
C) the quantity of loanable funds traded to decrease to $75 and the interest rate to rise to 7% (point E).
D) the quantity of loanable funds traded to increase to $125 and the interest rate to fall to 5% (point D).

Accepted Answer

The answer of Figure 26-5. Figure 26-5 shows the loanable...

Question 5

If the nominal interest rate is 2.5 percent and the inflation rate is 2 percent, what is the real interest rate?
A) .5 percent
B) 1.25 percent
C) 4.5 percent
D) None of the above is correct.

Accepted Answer

The answer of If the nominal interest rate is 2.5...

Question 6

A decrease in government spending and the enactment of an investment tax credit would definitely cause
A) the quantity of loanable funds traded to increase.
B) the interest rate to increase.
C) the quantity of loanable funds traded to decrease.
D) the interest rate to decrease.

Accepted Answer

The answer of A decrease in government spending and the...

Question 7

If the supply of and demand for loanable funds both shift left, which of the following necessarily happens?
A) the equilibrium interest rate falls
B) the equilibrium interest rate rises
C) the equilibrium quantity of loanable funds rises
D) the equilibrium quantity of loanable funds falls

Accepted Answer

When both the supply of and demand for loanable funds shift left, the equilibrium interest rate will increase. However, the equilibrium quantity of loanable funds will decrease because both borrowers and lenders are reducing their willingness to participate in the loan market, resulting in a decrease in the amount of funds borrowed and lent at the higher interest rate.

Question 8

The U.S. government increases its budget deficit, but at the same time Congress eliminates an investment tax credit. Which of the following is correct?
A) The interest rate will increase; investment may increase or decrease.
B) The interest rate will decrease; investment may increase or decrease.
C) The interest rate may increase or decrease; investment will decrease.
D) The interest rate may increase or decrease; investment will increase.

Accepted Answer

Increasing the budget deficit means the government is borrowing more money, which puts upward pressure on interest rates, as there is more demand for borrowing. Eliminating the investment tax credit reduces the incentive for businesses to invest, which decreases demand for borrowing and puts downward pressure on interest rates. The net effect is uncertain, but since the government is borrowing more, it is more likely that interest rates will increase. The decrease in investment demand will decrease investment overall.

Question 9

Suppose a country has a larger increase in debt in 2014 than it had in 2013. Then other things the same,
A) the supply of loanable funds shifts rightward and the interest rate falls.
B) the supply of loanable funds shifts leftward and the interest rate rises.
C) the demand for loanable funds shifts leftward and the interest rate falls.
D) the demand for loanable funds shifts rightward and the interest rate rises.

Accepted Answer

An increase in debt means that the country needs to borrow more funds, which increases the demand for loanable funds. However, since the supply of loanable funds doesn't change, this leads to a shift in the supply-demand balance towards higher interest rates. Therefore, the supply of loanable funds shifts to the left and the interest rate rises.

Question 10

Which of the following would shift the demand for loanable funds to the right?
A) income tax increases
B) government expenditures increase
C) the interest rate falls
D) Congress and the president pass an investment tax credit

Accepted Answer

Congress and the president passing an investment tax credit would incentivize borrowing and investment, leading to an increase in demand for loanable funds and a rightward shift in the demand curve. The other options would have the opposite effect of decreasing demand for loanable funds.

Question 11

If there is a shortage in the market for loanable funds, what happens to desired saving and desired investment as the interest rate moves to its equilibrium value?
A) desired saving and desired investment both fall
B) desired saving and desired investment both rise
C) desired saving falls and desired investment rises
D) desired saving rises and desired investment falls

Accepted Answer

If there is a shortage of loanable funds in the market, the interest rate will increase to reach equilibrium. As the interest rate rises, the opportunity cost of spending today (instead of saving) becomes higher, leading to a rise in desired saving. On the other hand, the cost of borrowing (interest rate) becomes higher, leading to a fall in desired investment. Therefore, desired saving rises and desired investment falls.

Question 12

In 2009 and 2010, the federal government's budget deficit was about
A) 5 percent of GDP, and this was the highest debt-GDP ratio in U.S history.
B) 10 percent of GDP, and this was the highest debt-GDP ratio in U.S history.
C) 5 percent of GDP, and this was the highest debt-GDP ratio since World War II.
D) 10 percent of GDP, and this was the highest debt-GDP ratio since World War II.

Accepted Answer

The federal government's budget deficit was about 10 percent of GDP in both 2009 and 2010, and this was the highest debt-GDP ratio since World War II.

Question 13

If the demand for loanable funds shifts to the right, then initially there is a
A) surplus so the interest rate will fall.
B) surplus so the interest rate will rise.
C) shortage so the interest rate will fall.
D) shortage so the interest rate will rise.

Accepted Answer

If the demand for loanable funds shifts to the right, there will be a shortage in the loanable funds market. This means that borrowers will be willing to pay a higher interest rate to obtain the funds they need. As a result, the interest rate will rise.

Question 14

An increase in the quantity of loanable funds traded means that
A) firms are borrowing less and investment decreases.
B) firms are borrowing less and investment increases.
C) firms are borrowing more and investment increases.
D) firms are borrowing more and investment decreases.

Accepted Answer

An increase in the quantity of loanable funds traded means that more funds are available for borrowing, leading to an increase in demand for investment. Therefore, firms are borrowing more and investment increases.

Question 15

Other things the same, if the government decreases transfer payments, then
A) both the interest rate and the equilibrium quantity of loanable funds fall.
B) both the interest rate and the equilibrium quantity of loanable funds rise.
C) the interest rate rises and the equilibrium quantity of loanable funds falls.
D) the interest rate falls and the equilibrium quantity of loanable funds rises.

Accepted Answer

The answer of Other things the same, if the government...

Question 16

Figure 26-5. Figure 26-5 shows the loanable funds market for a closed economy. 
-Refer to Figure 26-5. Starting at point A, a reduction in government spending would cause
A) the quantity of loanable funds traded to increase to $125 and the interest rate to rise to 7% (point C).
B) the quantity of loanable funds traded to decrease to $75 and the interest rate to fall to 5% (point B).
C) the quantity of loanable funds traded to increase to $125 and the interest rate to fall to 5% (point D).
D) the quantity of loanable funds traded to decrease to $75 and the interest rate to rise to 7% (point E).

Accepted Answer

Starting at point A, a reduction in government spending would decrease the demand for loanable funds, shifting the curve to the left. This would cause the equilibrium quantity to decrease to $125 and the interest rate to fall to 5% (point D). Therefore, the correct answer is C.

Question 17

Other things the same, the effects of an increase in transfer payments on the government's budget deficit will lead to
A) greater investment.
B) a higher interest rate.
C) higher public saving.
D) All of the above are correct.

Accepted Answer

The answer of Other things the same, the effects of...

Question 18

Other things the same, an increase in the budget deficit
A) shifts the demand for loanable funds right, so the interest rate rises.
B) shifts the demand for loanable funds left, so the interest rate falls.
C) shifts the supply of loanable funds right, so the interest rate falls.
D) shifts the supply of loanable funds left, so the interest rate rises.

Accepted Answer

The answer of Other things the same, an increase in...

Question 19

We interpret the meaning of "loanable funds" as the
A) flow of resources available from private saving.
B) flow of resources available to fund private investment.
C) resources borrowed by private investors and by government.
D) resources lent by private investors and by government.

Accepted Answer

Loanable funds refer to the amount of money available for borrowing from private savers and investors to fund private investment. This includes resources such as savings deposits, stocks, bonds and other financial assets that can be used to provide funds for investments. It does not refer to resources borrowed by private investors or government. The correct option is B.

Question 20

A government reduces its budget deficit, but at the same time people become concerned that the outlook for future government expenditures and revenues increase the chance it will default. Which of the following is correct?
A) The reduced budget deficit will raise interest rates in general. The increased risk of default will raise interest rates on government bonds.
B) The reduced budget deficit will raise interest rates in general. The increased risk of default will reduce interest rates on government bonds.
C) The reduced budget deficit will reduce interest rates in general. The increased risk of default will raise interest rates on government bonds.
D) The reduced budget deficit will reduce interest rates in general. The increased risk of default will reduce interest rates on government bonds.

Accepted Answer

When a government reduces its budget deficit, it means that it is spending less and borrowing less. This will lead to a reduction in interest rates in general, as there is less demand for credit in the market. However, if people become concerned that the government may default on its obligations in the future, they will demand a higher yield on government bonds to compensate for the increased risk. This will lead to an increase in interest rates on government bonds. Therefore, while the reduced budget deficit will reduce interest rates in general, the increased risk of default will raise interest rates on government bonds.

Quiz 26: Saving, Investment, and the Financial System

Figure 26-5. Figure 26-5 shows the loanable funds market for a closed economy. -Refer to Figure 26-5. Starting at point A, a change in tax laws that encouraged households to save more would likely cause

Kroger's grocery chain wants to finance the purchase of a new warehouse. It decides to sell bonds.

Other things the same, an increase in taxes with no change in government purchases makes national saving

Figure 26-5. Figure 26-5 shows the loanable funds market for a closed economy. -Refer to Figure 26-5. Starting at point A, the enactment of an investment tax credit would likely cause

If the nominal interest rate is 2.5 percent and the inflation rate is 2 percent, what is the real interest rate?

A decrease in government spending and the enactment of an investment tax credit would definitely cause

If the supply of and demand for loanable funds both shift left, which of the following necessarily happens?

The U.S. government increases its budget deficit, but at the same time Congress eliminates an investment tax credit. Which of the following is correct?

Suppose a country has a larger increase in debt in 2014 than it had in 2013. Then other things the same,

Which of the following would shift the demand for loanable funds to the right?

If there is a shortage in the market for loanable funds, what happens to desired saving and desired investment as the interest rate moves to its equilibrium value?

In 2009 and 2010, the federal government's budget deficit was about

If the demand for loanable funds shifts to the right, then initially there is a

An increase in the quantity of loanable funds traded means that

Other things the same, if the government decreases transfer payments, then

Figure 26-5. Figure 26-5 shows the loanable funds market for a closed economy. -Refer to Figure 26-5. Starting at point A, a reduction in government spending would cause

Other things the same, the effects of an increase in transfer payments on the government's budget deficit will lead to

Other things the same, an increase in the budget deficit

We interpret the meaning of "loanable funds" as the

A government reduces its budget deficit, but at the same time people become concerned that the outlook for future government expenditures and revenues increase the chance it will default. Which of the following is correct?