Saving, Investment, and the Financial System 6419
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.
6420 Saving, Investment, and the Financial System
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.
Saving, Investment, and the Financial System 6421
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.
6422 Saving, Investment, and the Financial System
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.
Saving, Investment, and the Financial System 6423
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.
6424 Saving, Investment, and the Financial System
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.
Saving, Investment, and the Financial System 6425
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.
6426 Saving, Investment, and the Financial System
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.
Saving, Investment, and the Financial System 6427
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.
6428 Saving, Investment, and the Financial System
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.
Saving, Investment, and the Financial System 6429
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.
6430 Saving, Investment, and the Financial System
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.
Saving, Investment, and the Financial System 6431
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.
6432 Saving, Investment, and the Financial System
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.
Saving, Investment, and the Financial System 6433
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.
6434 Saving, Investment, and the Financial System
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.
Saving, Investment, and the Financial System 6435
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.
6436 Saving, Investment, and the Financial System
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.
Saving, Investment, and the Financial System 6437
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.
6438 Saving, Investment, and the Financial System
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.