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100
500,000
50
600,000
Suppose that the available quantity of a certain type of farmland is 400,000 acres, and the
demand for this land is given in the table. If landowners were taxed at a rate of $150 per acre
for their land, what would be the economic rent on this land after taxes, and how many acres
would be rented?
D. $250 and 50,000 acres
145. To an individual firm or landowner, land rents do not appear to be a surplus because
D. landowners are, politically and economically, a powerful and well-organized group.
146. The price paid for the use of money is called
A. commission.
18-62
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
A c c e s s i b i l i t y : Keyboard Navigation
Blooms: Remember
D i f f i c u l t y : 01 Easy
Learning Objective: 18-02 Define interest and explain how interest rates vary based on risk,
maturity, loan size, and taxability.
Test Bank: II
Topic: Interest
147. If you pay $2,640 annually on a $22,000 loan A, and pay $1,800 on a $12,000 loan B,
then the interest rates are
A. 12 percent on loan A and 18 percent on loan B.
148. Which of the following is considered to be an economic resource?
A. rent
149. Economists would not consider which one of the following to be a productive economic
resource?
A. land
150. Most borrowers value money for
A. its own sake.
151. Which of the following interest rates is usually the highest?
A. 30-year mortgage rate
18-64
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Topic: Interest
152. Interest rates of various loans vary over a wide range due to differences in all of the
following, except
A. borrower characteristics.
153. Other things equal, the interest rate on a loan will be smaller,
A. the greater the risk involved.
154. Other things equal, the interest rate on a loan will be larger,
A. the less the risk involved.
18-65
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Remember
D i f f i c u l t y : 01 Easy
Learning Objective: 18-02 Define interest and explain how interest rates vary based on risk,
maturity, loan size, and taxability.
Test Bank: II
Topic: Interest
155. Other things equal, the interest rate on a loan will be larger,
D. if loan interest is exempt from taxation.
156. A bank charges one borrower (A) 8 percent interest per year and another borrower (B) 10
percent interest per year. Which of the following is a plausible reason for the higher interest
rate for B?
A. A is borrowing the money for a longer period than B.
157. The pure rate of interest in economic models is best approximated by the
A. 1-month Treasury bills.
18-66
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
B. prime interest rate.
C. federal funds rate.
D. 20-year Treasury bond rate.
158. "Pure rate of interest" refers to the interest rate that
A. borrowers pay to lenders in their own family or circle of close friends.
159. In general, if we compare two loans or bonds with the same loan size and taxability of
interest-income, we would expect a higher interest rate on the loan or bond with a
D. higher risk and shorter maturity.
18-67
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Topic: Interest
160. The loanable funds theory of interest shows that interest rates on loans are determined by
A. the amount of money supply that the government has pumped into the economy.
Topic: Loanable Funds Theory of Interest Rates
161. The demand curve for loanable funds represents the behavior of
A. lenders.
162. A firm considering whether to borrow money to purchase a capital good will compare the
rate of interest for the loan with the
A. opportunity cost of the capital good.
18-68
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Learning Objective: 18-02 Define interest and explain how interest rates vary based on risk,
maturity, loan size, and taxability.
Test Bank: II
Topic: Loanable Funds Theory of Interest Rates
163. A firm wants to borrow funds to purchase a new piece of equipment that costs $20,000
and has a useful life of one year. The investment is expected to produce an additional $1,500 in
total revenue. The firm will most likely make the investment if the interest rate is
D. 12 percent.
164.
Rate of Return (%)
Number of Investment Projects (for $1,000 each)
25
1
20
2
15
3
10
4
5
5
The table shows the projected rate of return and number of investment projects that might be
undertaken by a small firm. Each project requires an investment of $1,000. If the interest rate
increases from 5 percent to 15 percent, the amount of loanable funds demanded by this firm
A. increases by $1,000.
18-69
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 18-03 Explain the loanable funds theory of interest rates.
Test Bank: II
Topic: Loanable Funds Theory of Interest Rates
165.
Rate of Return (%)
Number of Investment Projects (for $1,000 each)
25
1
20
2
15
3
10
4
5
5
The table shows the projected rate of return and number of investment projects that might be
undertaken by a small firm. Each project requires an investment of $1,000. The number of
investment projects this firm would undertake will decrease from 4 to 2 if the interest rate in
the loanable funds market
D. increases from 15 percent to 20 percent.
166.
Rate of Return (%)
Number of Investment Projects (for $1,000 each)
25
1
20
2
15
3
10
4
5
5
The table shows the projected rate of return and number of investment projects that might be
undertaken by a small firm. Each project requires an investment of $1,000. If the interest rate
decreases from 25 percent to 20 percent, the quantity of loanable funds demanded by this firm
D. decreases by $4,000.
167. Which factor will decrease the demand for loanable funds?
A. a change in the tax law to exempt savings from taxation
168. The supply curve for loanable funds is upward-sloping because
A. lenders are more willing to lend at lower, rather than higher, interest rates.
18-71
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Test Bank: II
Topic: Loanable Funds Theory of Interest Rates
169.
Refer to the market for loanable funds, as shown in the graph. A decline in the interest rate is
likely to
A. lower capital investment.
170.
Refer to the market for loanable funds, as shown in the graph. Suppose investors who borrow
money in the loanable funds market become nervous and pessimistic about the economy in
general, and expected returns on investments in particular. We would expect to see a(n)
D. increase in the equilibrium quantity of loanable funds.
18-73
171.
Refer to the market for loanable funds, as shown in the graph. Suppose the market for loanable
funds is originally in equilibrium at interest rate i0 and quantity Q0. In the next period, the
equilibrium interest rate increases to i1 and quantity decreases to Q1. Which of the following
could be the cause of this shift?
D. Investors become more optimistic.
172.
Interest Rate
Quantity Demanded
Quantity Supplied
12
100
520
10
200
480
8
300
440
6
400
400
4
500
360
18-74
2
600
320
The schedule shows various interest rates, the associated quantity demanded of loanable funds,
and the quantity supplied of loanable funds in billions of dollars at those interest rates. What is
the equilibrium interest rate?
A. 4 percent
173.
Quantity Demanded
Quantity Supplied
12
100
520
10
200
480
8
300
440
6
400
400
4
500
360
2
600
320
The schedule shows various interest rates, the associated quantity demanded of loanable funds,
and the quantity supplied of loanable funds in billions of dollars at those interest rates. At an
interest rate of 8 percent, there will be
A. an excess supply of loanable funds of 440 billion.
18-75
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
AACSB: Knowledge Application
Blooms: Understand
Difficu lty: 02 Medium
Learning Objective: 18-03 Explain the loanable funds theory of interest rates.
Test Bank: II
Topic: Loanable Funds Theory of Interest Rates
174.
Interest Rate
Quantity Demanded
Quantity Supplied
12
100
520
10
200
480
8
300
440
6
400
400
4
500
360
2
600
320
The schedule shows various interest rates, the associated quantity demanded of loanable funds,
and the quantity supplied of loanable funds in billions of dollars at those interest rates. At an
interest rate of 4 percent, there will be
A. an excess supply of loanable funds of 140 billion.
175.
Interest Rate
Quantity Demanded
Quantity Supplied
12
100
520
10
200
480
8
300
440
6
400
400
4
500
360
2
600
320
The schedule shows various interest rates, the associated quantity demanded of loanable funds,
and the quantity supplied of loanable funds in billions of dollars at those interest rates. If
technology improved and the demand for loanable funds increased by $140 billion at each
interest rate, the new equilibrium interest rate would be
A. 2 percent.
176.
Interest Rate
Quantity Demanded
Quantity Supplied
12
100
520
10
200
480
8
300
440
6
400
400
4
500
360
2
600
320
The schedule shows various interest rates, the associated quantity demanded of loanable funds,
and the quantity supplied of loanable funds in billions of dollars at those interest rates. If
changes in tax laws made households save more by $140 billion at each interest rate, then the
new equilibrium interest rate would be
A. 2 percent.
18-77
177. The supply of loanable funds is an upward-sloping curve because the
A. higher the interest rate, the more households consume and the more households save.
178. Which of the following will increase the supply of loanable funds? An increase in the
A. rates of return on potential investments.
179. Which factor will increase the demand for loanable funds?
A. a change in the tax law to exempt savings from taxation
18-78
180. A decrease in the supply of loanable funds and an increase in the demand for loanable
funds will
A. increase the interest rate and the quantity of funds loaned.
181. There will be pressure on the interest rate for loanable funds to increase when
A. supply increases.
182. An increase in the demand for loanable funds may be caused by a(n)
A. increase in the availability of loanable funds.
18-79
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written consent of McGraw-Hill Education.
C. increase in business borrowing.
D. decrease in the interest rate.
183. If an economic expansion in the economy caused an increase in the demand for loanable
funds, what would be the effect on the interest rate and the quantity of funds loaned in the credit
market?
A. Interest rates would increase and the quantity of funds loaned would decrease.
184. Which of the following would cause an increase in interest rates in credit markets?
A. a decrease in business demand for credit
185. Suppose many businesses want to increase their stock of capital goods and decide to
borrow funds to do it. Which would be the likely result of this event?
D. The equilibrium quantity of loanable funds would remain unchanged.
186. Which of the following statements about interest rates is false?
A. Interest rates typically reflect the risk involved in extending a loan.
187. A decrease in saving that leads to an increase in the interest rate will
D. shift the demand for loanable funds to the left, causing a decrease in investment.
