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Indicate whether the statement is true or false.
1. Since the aggregate demand for loanable funds is the sum of the quantities demanded by the separate sectors, and since
most of these sectors are likely to demand a larger quantity of funds at lower interest rates (other things being equal), the
aggregate demand for loanable funds is positively related to interest rates at any point in time.
a. True
b. False
2. If foreign interest rates fall, foreign firms and governments would likely reduce their demand for U.S. funds.
a. True
b. False
3. To forecast the real interest rate for an upcoming period using the Fisher effect, the expected inflation rate over that
period is subtracted from the nominal interest rate quoted for that period.
a. True
b. False
4. The relationship between interest rates and expected inflation is often referred to as the loanable funds theory.
a. True
b. False
5. At any point in time, households and businesses demand a greater quantity of loanable funds at lower rates of interest.
a. True
b. False
6. The business demand for loanable funds is inversely related to the number of proposed projects implemented and
inversely related to the interest rate.
a. True
b. False
7. In general, suppliers of loanable funds are willing to supply more funds if the interest rate is higher.
a. True
b. False
8. If the aggregate demand for loanable funds increases without a corresponding increase in aggregate supply, there will
be a surplus of loanable funds.
a. True
b. False
9. Forecasters should consider future plans for corporate expansion and the future state of the economy when forecasting
business demand for loanable funds.
a. True
b. False
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10. Other things being equal, a smaller quantity of U.S. funds would be demanded by foreign governments and
corporations if their domestic interest rates were high relative to U.S. rates.
a. True
b. False
11. According to the Fisher effect, when the inflation rate is lower than anticipated, the real interest rate is relatively low.
a. True
b. False
12. According to the Fisher effect, if the real interest rate is zero, the nominal interest rate must be equal to the expected
inflation rate.
a. True
b. False
13. According to the loanable funds theory, market interest rates are determined by the factors that control the supply of
and demand for loanable funds.
a. True
b. False
14. The supply of loanable funds in the United States is partly determined by the monetary policy implemented by the
Federal Reserve System.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
15. Businesses demand loanable funds to
a. finance installment debt.
b. subsidize other companies.
c. invest in long-term (fixed) assets.
d. None of these are correct.
16. The required return to implement a given business project will be ____ if interest rates are lower. This implies that
businesses will demand a ____ quantity of loanable funds when interest rates are lower.
a. greater; lower
b. lower; greater
c. lower; lower
d. greater; greater
17. If economic expansion is expected to decrease, the demand for loanable funds should ____ and interest rates should
____.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
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18. Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal?
a. a decrease in saving by foreign savers
b. an increase in inflation
c. pessimistic economic projections that cause businesses to reduce expansion plans
d. a decrease in saving by U.S. households
19. If the federal government needs to borrow additional funds, this borrowing reflects a(n) ____ in the supply of loanable
funds and a(n) ____ in the demand for loanable funds.
a. increase; no change
b. decrease; no change
c. no change; increase
d. no change; decrease
20. A ____ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate,
causing an ____ shift in the demand schedule.
a. higher; inward
b. higher; outward
c. lower; outward
d. None of these are correct.
21. Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. securities.
This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S.
interest rates.
a. decrease; upward
b. decrease; downward
c. increase; downward
d. increase; upward
22. Which of the following will probably NOT result in an increase in the business demand for loanable funds?
a. an increase in economic growth
b. a reduction in interest rates on business loans
c. a recession
d. None of these are correct.
23. The expected impact of an increased expansion by businesses is an ____ shift in the demand schedule and ____ in the
supply schedule.
a. inward; an inward shift
b. inward; an outward shift
c. outward; an inward shift
d. outward; no obvious change
24. Assume that a credit crisis causes a weak economy, and the Fed increases money supply. These conditions should
cause
a. an increase in both the supply of and the demand for loanable funds.
b. a decrease in both the supply of and the demand for loanable funds.
c. a decrease in the supply of loanable funds and an increase in the demand for loanable funds.
d. an increase in the supply of loanable funds and a decrease in the demand for loanable funds.
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25. When Japanese interest rates rise, and exchange rate expectations remain unchanged, the most likely effect is that the
supply of loanable funds provided by Japanese investors to the United States will ____, and U.S. interest rates will ____.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
26. Which of the following statements is incorrect?
a. The Fed’s monetary policy is intended to influence U.S. economic conditions.
b. The Fed’s monetary policy affects the supply of loanable funds, which affects interest rates.
c. By influencing interest rates, the Fed is able to influence the amount of money that corporations and households
are willing to borrow and spend.
d. All of these are true.
27. When there are expectations of higher inflation in the future, we would typically expect the supply of loanable funds
to ____ and the demand for loanable funds to ____.
a. increase; decrease
b. increase; increase
c. decrease; increase
d. decrease; decrease
28. The demand for funds resulting from business investment in new projects is ____ related to the number of projects
implemented, and is therefore ____ related to the interest rate.
a. inversely; positively
b. positively; inversely
c. inversely; inversely
d. positively; positively
29. What is the basis of the relationship between the Fisher effect and the loanable funds theory?
a. savers’ desire to maintain the existing real rate of interest
b. borrowers’ desire to achieve a positive real rate of interest
c. savers’ desire to achieve a negative real rate of interest
d. borrowers’ desire to achieve a positive real rate of interest AND savers’ desire to achieve a negative real rate of
interest
30. If the economy weakens, there is ____ pressure on interest rates. If the Federal Reserve increases the money supply
there is ____ pressure on interest rates (assume that inflationary expectations are not affected).
a. upward; upward
b. upward; downward
c. downward; upward
d. downward; downward
31. The equilibrium interest rate should
a. fall when the aggregate supply of funds exceeds the aggregate demand for funds.
b. rise when the aggregate supply of funds exceeds the aggregate demand for funds.
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c. fall when the aggregate demand for funds exceeds the aggregate supply of funds.
d. rise when the aggregate demand for funds equals the aggregate supply of funds.
e. rise when the aggregate supply of funds exceeds the aggregate demand for funds AND fall when the aggregate
demand for funds exceeds the aggregate supply of funds.
32. Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. securities
and increase their holdings of securities in their own countries. This should cause the supply of loanable funds in the
United States to______ and should place ____ pressure on U.S. interest rates.
a. decrease; upward
b. decrease; downward
c. increase; downward
d. increase; upward
33. For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign governments or firms
will be ____ U.S. interest rates.
a. positively related to
b. inversely related to
c. unrelated to
d. None of these are correct.
34. The equilibrium interest rate
a. equates the aggregate demand for loanable funds with the aggregate supply of loanable funds.
b. equates the elasticity of the aggregate demand for and supply of loanable funds.
c. decreases as the aggregate supply of loanable funds decreases.
d. increases as the aggregate demand for loanable funds decreases.
35. The ____ suggests that the market interest rate is determined by factors that control the supply of and demand for
loanable funds.
a. Fisher effect
b. loanable funds theory
c. real interest rate
d. None of these are correct.
36. If inflation turns out to be lower than expected
a. savers benefit.
b. borrowers benefit while savers are not affected.
c. savers and borrowers are equally affected.
d. savers are adversely affected but borrowers benefit.
37. The real interest rate can be forecasted by subtracting the ___ from the ____ for that period.
a. nominal interest rate; expected inflation rate
b. prime rate; nominal interest rate
c. expected inflation rate; nominal interest rate
d. prime rate; expected inflation rate
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38. Other things being equal, foreign governments and corporations would demand ____ U.S. funds if their local interest
rates were lower than U.S. rates. Therefore, for a given set of foreign interest rates, foreign demand for U.S. funds is ____
related to U.S. interest rates.
a. less; inversely
b. more; positively
c. less; positively
d. more; inversely
39. The Fisher effect states that the
a. nominal interest rate equals the expected inflation rate plus the real rate of interest.
b. nominal interest rate equals the real rate of interest minus the expected inflation rate.
c. real rate of interest equals the nominal interest rate plus the expected inflation rate.
d. expected inflation rate equals the nominal interest rate plus the real rate of interest.
40. The quantity of loanable funds supplied is normally
a. highly interest-elastic.
b. more interest-elastic than the demand for loanable funds.
c. less interest-elastic than the demand for loanable funds.
d. equally as interest-elastic as the demand for loanable funds.
e. highly interest-elastic AND more interest-elastic than the demand for loanable funds.
41. The ____ sector is the largest supplier of loanable funds.
a. household
b. government
c. business
d. None of these are correct.
42. As a result of more favorable economic conditions, there is a(n) ____ demand for loanable funds, causing an ____
shift in the demand curve.
a. decreased; inward
b. decreased; outward
c. increased; outward
d. increased; inward
43. If the federal government reduces its budget deficit, this causes a(n) ____ in the supply of loanable funds and a(n)
____ in the demand for loanable funds.
a. increase; no change
b. decrease; no change
c. no change; increase
d. no change; decrease
44. If investors shift funds from stocks into bank deposits, this ____ the supply of loanable funds and places ____ pressure
on interest rates.
a. increases; upward
b. increases; downward
c. decreases; downward
d. decreases; upward
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45. If interest rates are ____, ____ projects will have expected returns that exceed a business’s particular required rate of
return.
a. higher; more
b. lower; more
c. lower; no
d. None of these are correct.
46. If inflation is expected to decrease, then
a. savers will provide less funds at the existing equilibrium interest rate.
b. the equilibrium interest rate will increase.
c. the equilibrium interest rate will decrease.
d. borrowers will demand more funds at the existing equilibrium interest rate.
47. If the real interest rate is expected to become negative, then the purchasing power of savings would be ____, as the
inflation rate is expected to be ____ the existing nominal interest rate.
a. decreasing; less than
b. decreasing; greater than
c. increasing; greater than
d. increasing; less than
48. Which of the following is a valid representation of the Fisher effect?
a. i = E(INF) + iR
b. iR = E(INF) + i
c. E(INF) = i + iR
d. None of these are correct.
49. Other things being equal, a ____ quantity of U.S. funds would be demanded by foreign governments and corporations
if their domestic interest rates were ____ relative to U.S. rates.
a. smaller; high
b. larger; high
c. larger; low
d. None of these are correct.
50. The level of installment debt as a percentage of disposable income is generally ____ during recessionary periods.
a. higher
b. lower
c. zero
d. negative
51. The crowding-out effect occurs when
a. foreign investors crowd out U.S. investors in the market for loanable funds.
b. the federal government’s demand for loanable funds due to a higher budget deficit crowds out the private demand
in the market for loanable funds.
c. institutional investors crowd out individual investors in the market for loanable funds.
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d. firms and municipal governments crowd out households in the market for loanable funds.
52. The federal government’s spending policies are generally thought to be _________ interest rates, but municipal
governments’ spending is somewhat ________ interest rates.
a. independent of; sensitive to
b. sensitive to; independent of
c. inversely rated to; positively related to
d. positively related to; inversely related to
53. The federal government’s demand for funds is ________, and municipal governments’ demand for funds is
____________.
a. interest-inelastic; very interest-inelastic
b. interest-elastic; interest-elastic
c. interest-inelastic; somewhat interest-elastic
d. interest-elastic; somewhat interest-inelastic
54. Which of the following is least likely to affect household demand for loanable funds?
a. a decrease in tax rates
b. an increase in interest rates
c. a reduction in available projects with an expected high rate of return
d. All of these are equally likely to affect household demand for loanable funds.
55. If the aggregate demand for loanable funds increases without a corresponding ____ in aggregate supply, there will be
a ____ of loanable funds.
a. increase; surplus
b. increase; shortage
c. decrease; surplus
d. decrease; shortage
56. The federal government’s demand for funds is said to be interest-inelastic, or ____ to interest rates.
a. sensitive
b. insensitive
c. relatively sensitive as compared to other sectors
d. None of these are correct.
57. The federal government’s _________ determines the budget deficit and therefore determines the government’s
demand for loanable funds.
a. monetary policy
b. fiscal policy
c. congressional policy
d. economic policy
58. The required rate of return to implement a proposed project will be ______ if interest rates are ________.
a. lower; higher
b. lower; lower
c. higher; lower
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d. higher; unchanged
59. Canada and the United States are major trading partners. If Canada experiences a major increase in economic growth,
that could place ____ pressure on Canadian interest rates and ____ pressure on U.S. interest rates.
a. upward; upward
b. upward; downward
c. downward; downward
d. downward; upward
60. If the real interest rate was negative for a period of time, then
a. inflation is expected to exceed the nominal interest rate in the future.
b. inflation is expected to be less than the nominal interest rate in the future.
c. actual inflation was less than the nominal interest rate during that period of time.
d. actual inflation was greater than the nominal interest rate during that period of time.
61. If economic conditions become less favorable, then
a. expected cash flows on various projects will increase.
b. the required rate of return on projects will increase.
c. there will be additional acceptable business projects.
d. there will be a decreased demand by business for loanable funds.
62. When forecasting future interest rates, if the net demand for funds (ND) becomes _____, there will be ______
adjustment in interest rates.
a. negative; an upward
b. negative; no
c. positive; an upward
d. positive; a downward
63. According to the Fisher effect, expectations of higher inflation cause savers to require a ____ on savings.
a. higher nominal interest rate
b. higher real interest rate
c. lower nominal interest rate
d. lower real interest rate
64. At any given point in time, households would demand a ____ quantity of loanable funds at ____ rates of interest.
a. greater; higher
b. greater; lower
c. smaller; lower
d. None of these are correct.
65. The federal government’s demand for loanable funds is ____. If the budget deficit is expected to increase, the federal
government’s demand for loanable funds will ____.
a. interest-elastic; decrease
b. interest-elastic; increase
c. interest-inelastic; increase
d. interest-inelastic; decrease
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66. Which of the following is NOT true regarding foreign interest rates?
a. The large flow of funds between countries causes interest rates in any given country to become more susceptible
to interest rate movements in other countries.
b. If a foreign country is experiencing high inflation, its equilibrium interest rate is likely to be higher than the U.S.
equilibrium interest rate.
c. An increase in a foreign country’s interest rates will likely decrease demand for U.S. loanable funds by businesses
in that country.
d. All of these are true regarding foreign interest rates.
67. If a strong economy allows for a large ____ in households’ income, the supply curve will shift ____.
a. decrease; outward
b. increase; inward
c. increase; outward
d. None of these are correct.
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Answer Key
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