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13) At the beginning of the year, United Delivery had trucks valued at $1.3 million. During
the year, United Delivery purchased new trucks valued at $500,000. If the value of the
trucks at the end of the year was $1.5 million, what is the amount of its net investment and
its depreciation during the year?
Skill: Level 3: Using models
Section: Checkpoint 10.1
Status: Old
AACSB: Analytical thinking
10.7 Essay: The Loanable Funds Market
1) "An increase in the real interest rate increases the quantity of investment." Is the
previous statement correct or incorrect?
Skill: Level 2: Using deinitions
Section: Checkpoint 10.2
Status: Old
AACSB: Relective thinking
2) Explain the relationship between the real interest rate and investment demand.
Compare that relationship to the relationship between expected proit and investment
demand.
Skill: Level 3: Using models
Section: Checkpoint 10.2
Status: Old
AACSB: Written and oral communication
3) How does an increase in expected proit afect investment demand and the demand for
loanable funds curve?
Skill: Level 2: Using deinitions
Section: Checkpoint 10.2
Status: Old
AACSB: Relective thinking
4) Does a change in the real interest rate shift the supply of loanable funds curve? Explain
your answer.
curve. Instead, the change in the real interest rate results in a change in the quantity of
loanable funds supplied and a movement along the supply of loanable funds curve. The
supply of loanable funds curve shifts if some factor that inluences the supply of loanable
funds other than the real interest rate changes.
Skill: Level 3: Using models
Section: Checkpoint 10.2
Status: Old
AACSB: Written and oral communication
5) What are the factors that change saving and shift the supply of loanable funds curve?
Skill: Level 3: Using models
Section: Checkpoint 10.2
Status: Old
AACSB: Written and oral communication
6) Explain how each of the following events would afect the supply of loanable funds
curve:
a. The economy is in a recession so people's disposable income is lower.
b. The stock market is booming so people's wealth is higher.
c. The future looks a bit more grim, so expected future income is lower.
d. The real interest rate increases.
Skill: Level 3: Using models
Section: Checkpoint 10.2
Status: Old
AACSB: Written and oral communication
91
7) "A shortage in the loanable funds market occurs when the quantity of loanable funds
supplied exceeds the quantity of loanable funds demanded." Explain why this statement is
correct or incorrect.
Skill: Level 1: Deinition
Section: Checkpoint 10.2
Status: Old
AACSB: Relective thinking
8) "In the loanable funds market, when there is a shortage of funds, the real interest rate
will increase." Explain whether the previous statement is correct or not.
Skill: Level 1: Deinition
Section: Checkpoint 10.2
Status: Old
AACSB: Relective thinking
9) In the loanable funds market, what will change to eliminate a shortage of loanable funds
and how is the shortage eliminated?
Skill: Level 3: Using models
Section: Checkpoint 10.2
Status: Old
AACSB: Written and oral communication
92
10) How does each of the following shift the supply of loanable funds and the demand for
loanable funds curves? What is the efect of each on the equilibrium real interest rate and
equilibrium quantity of loanable funds?
a. Households' disposable incomes increase
b. An increase in expected proit
Skill: Level 3: Using models
Section: Checkpoint 10.2
Status: Old
AACSB: Analytical thinking
11) Suppose a government tax cut increases disposable income. If there is no change in the
government deicit or surplus, what efect would this tax cut have on the supply of loanable
funds and the demand for loanable funds? What will happen to the real interest rate?
Skill: Level 3: Using models
Section: Checkpoint 10.2
Status: Old
AACSB: Analytical thinking
93
12) The table above shows the supply of loanable funds and the demand for loanable funds
schedules.
a. What is the equilibrium real interest rate and the equilibrium quantity of loanable
funds?
b. If the real interest rate is 4 percent, is there a shortage or surplus? What will happen in
the market?
Skill: Level 3: Using models
Section: Checkpoint 10.2
Status: Old
AACSB: Analytical thinking
94
13) Using the igure above, show the efect on the real interest rate and the quantity of
loanable funds of an increase in expected proit.
Skill: Level 3: Using models
Section: Checkpoint 10.2
Status: Old
AACSB: Analytical thinking
95
10.8 Essay: Government in Loanable Funds Market
1) Ignoring the Ricardo-Barro efect, what impact does the government have in the
loanable funds market?
Skill: Level 2: Using deinitions
Section: Checkpoint 10.3
Status: Old
AACSB: Relective thinking
2) Explain how a government budget deicit might crowd out private investment.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.3
Status: Old
AACSB: Written and oral communication
3) "The crowding-out efect occurs when a government budget surplus reduces private
savings." Is the previous statement true or false? Explain your answer.
Skill: Level 2: Using deinitions
Section: Checkpoint 10.3
Status: Old
AACSB: Written and oral communication
4) "A government surplus can decrease investment through the crowding-out efect
because the surplus decreases the supply of loanable funds." Is the previous assertion right
or wrong? Why?
Skill: Level 2: Using deinitions
Section: Checkpoint 10.3
Status: Old
AACSB: Analytical thinking
96
5) According to the crowding-out efect, if the government runs a budget deicit of $100
billion, what is the change in the equilibrium quantity of investment?
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: Old
AACSB: Analytical thinking
6) What is the crowding-out efect and how does it operate? What is its relationship to the
Ricardo-Barro efect?
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: Old
AACSB: Analytical thinking
7) Discuss why a budget deicit results in a diferent real interest rate under the Ricardo-
Barro efect than under the crowding-out efect.
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: Old
AACSB: Written and oral communication
97
8) According to the Ricardo-Barro efect, if the government runs a budget deicit of $100
billion, by how much does the amount of equilibrium investment increase or decrease?
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: Old
AACSB: Written and oral communication
9) According to the Ricardo-Barro efect, what is the efect on the real interest rate of a
government budget surplus?
Skill: Level 5: Critical thinking
Section: Checkpoint 10.3
Status: Old
AACSB: Analytical thinking
10) The table above gives the demand for loanable funds and private supply of loanable
funds schedules.
a. What is the equilibrium real interest rate and quantity of loanable funds?
b. Suppose that the government has a budget surplus of $2.5 billion. If there is no
Ricardo-Barro efect, what is the equilibrium real interest rate and quantity of loanable
funds?
Skill: Level 3: Using models
Section: Checkpoint 10.3
Status: Old
AACSB: Analytical thinking
98
