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1. The source of the supply of loanable funds
a.
is saving and the source of demand for loanable funds is investment.
b.
is investment and the source of demand for loanable funds is saving.
c.
and the demand for loanable funds is saving.
d.
and the demand for loanable funds is investment.
Table 26-3. The following table presents information about a closed economy whose market for loanable funds is in
equilibrium.
GDP
$8.7 trillion
Consumption Spending
$6.1 trillion
Taxes Net of Transfers
$1.0 trillion
Government Purchases
$0.8 trillion
2. Refer to Table 26-3. Determine the quantity of private saving.
a.
$0.2 trillion
b.
$1.6 trillion
c.
$1.8 trillion
d.
$2.6 trillion
3. Refer to Table 26-3. Determine the quantity of loanable funds demanded.
a.
$1.8 trillion
b.
$1.6 trillion
c.
$1.4 trillion
d.
$0.8 trillion
4. The slope of the demand for loanable funds curve represents the
a.
positive relation between the real interest rate and investment.
b.
negative relation between the real interest rate and investment.
c.
positive relation between the real interest rate and saving.
d.
negative relation between the real interest rate and saving.
5. The Eye of Horus incense company has $10 million in cash which it has accumulated from retained earnings. It was
planning to use the money to build a new factory. Recently, the rate of interest has increased. The increase in the rate of
interest should
a.
not influence the decision to build the factory because The Eye of Horus doesn't have to borrow any money.
b.
not influence the decision to build the factory because its stockholders are expecting a new factory.
c.
make it more likely that The Eye of Horus will build the factory because a higher interest rate will make the
factory more valuable.
d.
make it less likely that The Eye of Horus will build the factory because the opportunity cost of the $10 million
is now higher.
6. Other things the same, when the interest rate rises,
a.
people would want to lend more, making the supply of loanable funds increase.
b.
people would want to lend less, making the supply of loanable funds decrease.
c.
people would want to lend more, making the quantity of loanable funds supplied increase.
d.
people would want to lend less, making the quantity of loanable funds supplied decrease.
7. Kathleen is considering expanding her dress shop. If interest rates rise she is
a.
less likely to expand. This illustrates why the supply of loanable funds slopes downward.
b.
more likely to expand. This illustrates why the supply of loanable funds slopes upward.
c.
less likely to expand. This illustrates why the demand for loanable funds slopes downward.
d.
more likely to expand. This illustrates why the demand for loanable funds slopes upward.
8. The slope of the supply of loanable funds curve represents the
a.
positive relation between the real interest rate and investment.
b.
positive relation between the real interest rate and saving.
c.
negative relation between the real interest rate and investment.
d.
negative relation between the real interest rate and saving.
9. Other things the same, a higher interest rate induces people to
a.
save more, so the supply of loanable funds slopes upward.
b.
save less, so the supply of loanable funds slopes downward.
c.
invest more, so the supply of loanable funds slopes upward.
d.
invest less, so the supply of loanable funds slopes downward.
10. The supply of loanable funds slopes
a.
upward because an increase in the interest rate induces people to save more.
b.
downward because an increase in the interest rate induces people to save less.
c.
downward because an increase in the interest rate induces people to invest less.
d.
upward because an increase in the interest rate induces people to invest more.
11. Other things the same, an increase in the interest rate
a.
would shift the demand for loanable funds to the right.
b.
would shift the demand for loanable funds to the left.
c.
would increase the quantity of loanable funds demanded.
d.
would decrease the quantity of loanable funds demanded.
12. If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied,
a.
there is a surplus and the interest rate is above the equilibrium level.
b.
there is a surplus and the interest rate is below the equilibrium level.
c.
there is a shortage and the interest rate is above the equilibrium level.
d.
there is a shortage and the interest rate is below the equilibrium level.
13. If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded,
a.
there is a surplus and the interest rate is above the equilibrium level.
b.
there is a surplus and the interest rate is below the equilibrium level.
c.
there is a shortage and the interest rate is above the equilibrium level.
d.
there is a shortage and the interest rate is below the equilibrium level.
14. If there is a surplus of loanable funds, then
a.
the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest
rate is above equilibrium.
b.
the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest
rate is below equilibrium.
c.
the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest
rate is above equilibrium.
d.
the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest
rate is below equilibrium.
15. If there is a shortage of loanable funds, then
a.
the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest
rate is above equilibrium.
b.
the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest
rate is below equilibrium.
c.
the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest
rate is above equilibrium.
d.
the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest
rate is below equilibrium.
16. If there is a surplus of loanable funds, then
a.
the quantity demanded is greater than the quantity supplied and the interest rate will rise.
b.
the quantity demanded is greater than the quantity supplied and the interest rate will fall.
c.
the quantity supplied is greater than the quantity demanded and the interest rate will rise.
d.
the quantity supplied is greater than the quantity demanded and the interest rate will fall.
17. If there is a shortage of loanable funds, then
a.
the quantity demanded is greater than the quantity supplied and the interest rate will rise.
b.
the quantity demanded is greater than the quantity supplied and the interest rate will fall.
c.
the quantity supplied is greater than the quantity demanded and the interest rate will rise.
d.
the quantity supplied is greater than the quantity demanded and the interest rate will fall.
18. If there is shortage of loanable funds, then
a.
the supply for loanable funds shifts right and the demand shifts left.
b.
the supply for loanable funds shifts left and the demand shifts right.
c.
neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases
as the interest rate rises to equilibrium.
d.
neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases
as the interest rate falls to equilibrium.
19. If there is surplus of loanable funds, then
a.
the supply for loanable funds shifts right and the demand shifts left.
b.
the supply for loanable funds shifts left and the demand shifts right.
c.
neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases
as the interest rate rises to equilibrium.
d.
neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases
as the interest rate falls to equilibrium.
20. If the demand for loanable funds shifts to the right, then the equilibrium interest rate
a.
and quantity of loanable funds rises.
b.
and quantity of loanable funds falls.
c.
rises and the quantity of loanable funds falls.
d.
falls and the quantity of loanable funds rises.
21. If the demand for loanable funds shifts to the left, then the equilibrium interest rate
a.
and quantity of loanable funds rises.
b.
and quantity of loanable funds falls.
c.
rises and the quantity of loanable funds falls.
d.
falls and the quantity of loanable funds rises.
22. If the supply for loanable funds shifts to the left, then the equilibrium interest rate
a.
and quantity of loanable funds rises.
b.
and quantity of loanable funds falls.
c.
rises and the quantity of loanable funds falls.
d.
falls and the quantity of loanable funds rises.
23. If the supply of loanable funds shifts to the right, then the equilibrium interest rate
a.
and quantity of loanable funds rises.
b.
and quantity of loanable funds falls.
c.
rises and the quantity of loanable funds falls.
d.
falls and the quantity of loanable funds rises.
24. Which of the following could explain an increase in the interest rate and the equilibrium quantity of loanable funds?
a.
The demand for loanable funds shifted rightward.
b.
The demand for loanable funds shifted leftward.
c.
The supply of loanable funds shifted rightward.
d.
The supply of loanable funds shifted leftward.
25. Which of the following would necessarily create a surplus at the original equilibrium interest rate in the loanable funds
market?
a.
an increase in the supply of or a decrease in the demand for loanable funds
b.
an increase in the supply of or an increase in the demand for loanable funds
c.
a decrease in the supply of or a decrease in the demand for loanable funds
d.
a decrease in the supply of or an increase in the demand for loanable funds
26. Which of the following could explain a decrease in the equilibrium interest rate and in the equilibrium quantity of
loanable funds?
a.
The demand for loanable funds shifted rightward.
b.
The demand for loanable funds shifted leftward.
c.
The supply of loanable funds shifted rightward.
d.
The supply of loanable funds shifted leftward.
27. Which of the following could explain a decrease in the equilibrium interest rate and an increase in the equilibrium
quantity of loanable funds?
a.
The demand for loanable funds shifted rightward.
b.
The demand for loanable funds shifted leftward.
c.
The supply of loanable funds shifted rightward.
d.
The supply of loanable funds shifted leftward.
28. Which of the following could explain an increase in the equilibrium interest rate and a decrease in the equilibrium
quantity of loanable funds?
a.
The demand for loanable funds shifted right.
b.
The demand for loanable funds shifted left.
c.
The supply of loanable funds shifted right.
d.
The supply of loanable funds shifted left.
29. Which of the following would necessarily increase the equilibrium interest rate?
a.
The demand for and the supply of loanable funds shift right.
b.
The demand for and the supply of loanable funds shift left.
c.
The demand for loanable funds shifts right and the supply of loanable funds shifts left.
d.
The demand for loanable funds shifts left and the supply of loanable funds shifts right.
30. In 2002 mortgage rates fell and mortgage lending increased. Which of the following could explain both of these
changes?
a.
The demand for loanable funds shifted rightward.
b.
The demand for loanable funds shifted leftward.
c.
The supply of loanable funds shifted rightward.
d.
The supply of loanable funds shifted leftward.
31. The nominal interest rate is the
a.
interest rate corrected for inflation.
b.
interest rate as usually reported by banks.
c.
real rate of return to the lender.
d.
real cost of borrowing to the borrower.
32. The real interest rate is the
a.
interest rate corrected for inflation.
b.
interest rate as usually reported by banks.
c.
difference between the interest rate charged by banks on the loans they make and the interest rate paid by
banks to their depositors.
d.
difference between the average dividend yield on stocks and the average interest rate on bonds.
33. If the nominal interest rate is 7 percent and the rate of inflation is 3 percent, then the real interest rate is
a.
7 percent.
b.
4 percent.
c.
3 percent.
d.
10 percent.
34. If the inflation rate is 2 percent and the real interest rate is 7 percent, then the nominal interest rate is
a.
3.5 percent.
b.
5 percent.
c.
9 percent
d.
7 percent.
35. If the nominal interest rate is 3 percent and the inflation rate is 4 percent, then the real interest rate is
a.
7 percent.
b.
-1 percent.
c.
3 percent.
d.
4 percent.
36. If the nominal interest rate is 7 percent and the real interest rate is 2 percent, then what is the inflation rate?
a.
9.0 percent
b.
5 percent
c.
3.5 percent
d.
None of the above is correct.
37. Which of the following statements is correct?
a.
As a group, economists see no purpose in distinguishing between the nominal interest rate and the real interest
rate.
b.
The interest rate that is usually reported is the nominal interest rate.
c.
If the nominal interest rate increases and the inflation rate remains unchanged, then the real interest rate
decreases.
d.
All of the above are correct.
38. Which of the following statements is correct?
a.
The interest rate that is usually reported is the interest rate that has been corrected for inflation.
b.
The supply of, and demand for, loanable funds depend on the real (rather than nominal) interest rate.
c.
If the nominal interest rate has decreased and the real interest rate has also decreased, then the inflation rate
must have decreased as well.
d.
All of the above are correct.
39. Suppose the market for loanable funds is in equilibrium. What would happen in the market for loanable funds, other
things the same, if the Congress and President increased the maximum contribution limits to 401(k) and 403(b) tax-
deferred retirement accounts?
a.
the interest rate and quantity of loanable funds would increase
b.
the interest rate and quantity of loanable funds would decrease.
c.
the interest rate would increase and the quantity of loanable funds would decrease.
d.
the interest rate would decrease and the quantity of loanable funds would increase.
40. What would happen in the market for loanable funds if the government were to increase the tax on interest income?
a.
Interest rates would rise.
b.
Interest rates would be unaffected.
c.
Interest rates would fall.
d.
The effect on the interest rate is uncertain.
41. What would happen in the market for loanable funds if the government were to decrease the tax rate on interest
income?
a.
There would be an increase in the amount of loanable funds borrowed.
b.
There would be a reduction in the amount of loanable funds borrowed.
c.
There would be no change in the amount of loanable funds borrowed.
d.
The change in loanable funds is uncertain.
42. If Congress increased the tax rate on interest income, investment
a.
would increase and saving would decrease.
b.
would decrease and saving would increase.
c.
and saving would increase.
d.
and saving would decrease.
43. If the government institutes policies that diminish incentives to save, then in the loanable funds market
a.
the demand for loanable funds shifts rightward.
b.
the demand for loanable funds shifts leftward.
c.
the supply of loanable funds shifts rightward.
d.
the supply of loanable funds shifts leftward.
44. If a reform of the tax laws encourages greater saving, the result would be
a.
higher interest rates and greater investment.
b.
higher interest rates and less investment.
c.
lower interest rates and greater investment.
d.
lower interest rate and less investment.
45. What would happen in the market for loanable funds if the government were to increase the tax on interest income?
a.
The supply of loanable funds would shift right.
b.
The demand for loanable funds would shift right.
c.
The supply of loanable funds would shift left.
d.
The demand for loanable funds would shift left.
46. What would happen in the market for loanable funds if the government were to decrease the tax rate on interest
income?
a.
The supply of and demand for loanable funds would shift right.
b.
The supply of and demand for loanable funds would shift left.
c.
The supply of loanable funds would shift right and the demand for loanable funds would shift left.
d.
None of the above is correct.
47. What would happen in the market for loanable funds if the government were to decrease the tax rate on interest
income?
a.
The supply of loanable funds would shift rightward and investment would increase.
b.
The supply of loanable funds would shift leftward and investment would decrease.
c.
The demand for loanable funds would shift rightward and investment would increase.
d.
The demand for loanable funds would shift leftward and investment would decrease.
48. Suppose the government were to replace the income tax with a consumption tax so that interest on savings was not
taxed. The result would be that the interest rate
a.
and investment both would increase.
b.
and investment both would decrease.
c.
would increase and investment would decrease.
d.
would decrease and investment would increase.
49. Which of the following would not be a result of replacing the income tax with a consumption tax so that interest
income was no longer taxed?
a.
The interest rate would decrease.
b.
Investment would decrease.
c.
The standard of living would eventually rise.
d.
The supply of loanable funds would shift right.
50. If in the past Congress had taken additional actions to make saving more rewarding, then today it is likely that the
equilibrium interest rate
a.
and the equilibrium quantity of loanable funds both would be lower.
b.
and the equilibrium quantity of loanable funds both would be higher.
c.
would be higher and the equilibrium quantity of loanable funds would be lower.
d.
would be lower and the equilibrium quantity of loanable funds would be higher.
51. Suppose a country has a consumption tax that is similar to a state sales tax. If its government were to eliminate the
consumption tax and replace it with an income tax that includes an income tax on interest from savings, what would
happen?
a.
There would be no change in the interest rate or saving.
b.
The interest rate would decrease and saving would increase.
c.
The interest rate would increase and saving would decrease.
d.
None of the above is correct.
52. Suppose a country has only a sales tax. Now suppose it replaces the sales tax with an income tax that includes a tax on
interest income. This would make equilibrium
a.
interest rates and the equilibrium quantity of loanable funds rise.
b.
interest rates rise and the equilibrium quantity of loanable funds fall.
c.
interest rates fall and the equilibrium quantity of loanable funds rise.
d.
interest rates and the equilibrium quantity of loanable funds fall.
53. Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer’s interest
income was tax free. This would shift the
a.
supply of loanable funds to the right, causing interest rates to fall.
b.
supply of loanable funds to the left, causing interest rates to rise.
c.
demand for loanable funds to the right, causing interest rates to rise.
d.
demand for loanable funds to the left, causing interest rates to fall.
54. Which of the following is NOT correct?
a.
Many economist oppose increases in how much people save.
b.
Saving is an important long-run determinant of a nation's standard of living.
c.
A change in tax laws that encouraged greater saving would lower interest rates.
d.
Taxes on interest income can substantially decrease the future value of current saving.
55. If Congress instituted an investment tax credit, the interest rate would
a.
rise and saving would rise.
b.
fall and saving would fall.
c.
rise and saving would fall.
d.
fall and saving would rise.
56. If Congress instituted an investment tax credit, the equilibrium quantity of loanable funds would
a.
rise.
b.
fall.
c.
be unchanged.
d.
move in an uncertain direction.
57. Suppose the U.S. offered a tax credit for firms that built new factories in the U.S. Then
a.
the demand for loanable funds would shift rightward, initially creating a surplus of loanable funds at the
original interest rate.
b.
the demand for loanable funds would shift rightward, initially creating a shortage of loanable funds at the
original interest rate.
c.
the supply of loanable funds would shift rightward, initially creating a surplus of loanable funds at the original
interest rate.
d.
the supply of loanable funds would shift rightward, initially creating a shortage of loanable funds at the
original interest rate.
58. Suppose that Congress were to institute an investment tax credit. What would happen in the market for loanable
funds?
a.
The demand for loanable funds would shift left.
b.
The supply of loanable funds would shift left.
c.
The demand for loanable funds would shift right.
d.
The supply of loanable funds would shift right.
59. Suppose that Congress were to repeal an investment tax credit. What would happen in the market for loanable funds?
a.
The demand and supply of loanable funds would shift right.
b.
The demand and supply of loanable funds would shift left.
c.
The supply of loanable funds would shift right.
d.
The demand for loanable funds would shift left.
60. Suppose a country repealed its investment tax credit. The effects of this are represented by shifting the
a.
demand for and the supply of loanable funds to the right.
b.
demand for and the supply of loanable funds to the left.
c.
supply of loanable funds to the right and the demand for loanable funds to the left.
d.
None of the above is correct.
61. Suppose Congress institutes an investment tax credit. What would happen in the market for loanable funds?
a.
The interest rate and investment would fall.
b.
The interest rate and investment would rise.
c.
The interest rate would rise and investment would fall.
d.
None of the above is necessarily correct.
62. In the loanable funds model, an increase in an investment tax credit would create a
a.
shortage at the former equilibrium interest rate. This shortage would lead to a rise in the interest rate.
b.
shortage at the former equilibrium interest rate. This shortage would lead to a fall in the interest rate.
c.
surplus at the former equilibrium interest rate. This surplus would lead to a rise in the interest rate.
d.
surplus at the former equilibrium interest rate. This surplus would lead to a fall in the interest rate.
63. If the government currently has a budget deficit, then
a.
it does not necessarily have a debt.
b.
its debt is increasing.
c.
government expenditures are greater than taxes.
d.
All of the above are correct.
64. A budget deficit
a.
changes the supply of loanable funds.
b.
changes the demand for loanable funds.
c.
changes both the supply of and demand for loanable funds.
d.
does not influence the supply of or the demand for loanable funds.
65. Other things the same, a government budget deficit
a.
reduces public saving, but not national saving.
b.
reduces national saving, but not public saving.
c.
reduces both public and national saving.
d.
reduces neither public saving nor national saving.
66. A larger budget surplus
a.
raises the interest rate and investment.
b.
reduces the interest rate and investment.
c.
raises the interest rate and reduces investment.
d.
reduces the interest rate and raises investment.
