Unit 4 - Loanable Funds

If businesses become optimistic about the profitability of investments in an economy, which of the following will happen in the loanable funds market in the short run?

• The supply and demand for loanable funds will increase.
• The real interest rate will decrease.
• The supply and demand for loanable funds will decrease.
• The demand for loanable funds by the private sector will decrease.
• The real interest rate will increase.

An increase in the demand for loanable funds could be best explained by which of the following?

• There is a decrease in investment spending.
• There is an increase in the government’s budget surplus.
• Firms are optimistic about the future performance of the country’s economy.
• Domestic investors seek higher returns by investing in foreign financial assets.
• The economy is facing political instability.

Which of the following will most likely result in a lower real interest rate in a nation?

• The nation provides an investment tax credit to new businesses.
• The citizens of the nation increase their savings for retirement.
• The citizens of the nation increase their savings for retirement.
• The nation’s central bank sells government bonds in the open market.
• The nation’s government increases its borrowing to finance spending on capital projects.

All of the following changes will shift the investment demand curve to the right EXCEPT

• a decrease in the corporate income tax rate
• an increase in the productivity of new capital goods
• an increase in the real interest rate
• an increase in corporate profits
• an increase in real gross domestic product

An increase in government spending with no change in taxes leads to a

• lower income level
• lower price level
• smaller money supply
• higher interest rate
• higher bond price

In the short run, government deficit spending will most likely

• raise the unemployment rate
• lower the inflation rate
• raise nominal interest rates
• lower private savings
• raise net exports

An increase in investment demand for capital goods accompanied by an increase in household savings will result in which of the following in the market for loanable funds?

• The demand curve for loanable funds will shift to the right along an unchanged supply curve, increasing the quantity supplied of funds and the real interest rate
• The demand and supply curves of loanable funds will shift to the right, causing a decrease in the real interest rate.
• The equilibrium real interest rate will increase, but the impact on the quantity of loanable funds is indeterminate
• The equilibrium quantity of loanable funds will increase, but the impact on the real interest rate is indeterminate
• There will be a surplus of funds in the market for loanable funds

Which of the following changes would most likely cause an increase in interest rates in the short run?

• A decrease in reserve requirements
• An increase in trade deficits
• An open market purchase of government bonds
• An increase in government spending financed by borrowing
• An increase in the price of bonds

Which of the following will cause an increase in the equilibrium real interest rate?

• An increase in investment demand
• An increase in national saving
• An increase in the government budget surplus
• A decrease in the government budget deficit
• The purchase of government bonds by the central bank

Which of the following is most likely to increase the real interest rate in Country Z ?

• Country Z’s central bank purchases government securities from banks and citizens.
• Country Z reduces government expenditures.
• Country Z is viewed as having increased political and economic risk.
• Country Z’s citizens increase their savings in anticipation of needed retirement income.
• Country Z introduces a tax on consumption goods.