ECO 2013 Lecture Notes - Lecture 11: Loanable Funds, Real Interest Rate, Pound Sterling

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24 Nov 2017

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Borrowers will be better off and lenders will be worse off. When the loanable funds and foreign exchange markets are in equilibrium, the leakages from the circular flow will equal the injections into it. The three reasons why the aggregate demand curve slopes downward are the real balance effect, the international substitution effect and the interest rate effect. As prices rise, consumers and businesses will want to hold larger money balances. This will lead to a reduction in the supply of loanable funds and an increase in the interest rate. As prices rise, a fixed money supply will be able to buy fewer goods and services. This effect is due to a(n) decline in the purchasing power of money. If the value of a nation"s imports exceeds exports, the nation has a trade deficit. As the real interest rate in the domestic loanable funds market increases, the net inflow of capital from abroad will increase.

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QUESTION 11

If the demand for investment loans rises, this could be the result of

		the discovery of new and better roundabout methods of production.
		a lower rate of time preference in society.
		a lower interest rate.
		a higher interest rate.
		a and c

1 points

QUESTION 12

Which of the following statements is true?

		All persons have a high rate of time preference.
		People with a high rate of time preference are more likely to be borrowers than people with a low rate of time preference.
		People with a high rate of time preference are more likely to be lenders than people with a low rate of time preference.
		A high interest rate is the cause of a high rate of time preference.
		none of the above

1 points

QUESTION 13

Which of the following statements is true?

		The nominal interest rate is always higher than the real interest rate since the nominal interest rate equals the real interest rate plus the expected inflation rate.
		The nominal interest rate is always lower than the real interest rate since the nominal interest rate equals the real interest rate minus the expected inflation rate.
		The nominal interest rate can equal the real interest rate, but to do so the expected inflation rate must be zero percent.
		It is the nominal interest rate-not the real interest rate-that matters to borrowers.

1 points

QUESTION 14

If there is an increase in the expected inflation rate, then,

		the supply and demand for loanable funds will decrease.
		the supply and demand for loanable funds will increase.
		the supply of loanable funds will decrease, and the demand for loanable funds will increase.
		the supply of loanable funds will increase, and the demand for loanable funds will decrease.

1 points

QUESTION 15

If suddenly a 4 percent inflation rate (instead of a zero percent inflation rate) is expected by both suppliers and demanders in the loanable funds market, then

		the demand for loanable funds curve will shift rightward, and the supply of loanable funds curve will shift leftward.
		the demand for loanable funds curve will shift leftward, and the supply of loanable funds curve will shift rightward.
		both the demand for loanable funds curve and the supply of loanable funds curve will shift leftward.
		both the demand for loanable funds curve and the supply of loanable funds curve will shift rightward.

6.As the result of unanticipated inflation, borrowers are better off while lenders are worse off if the actual inflation rate
Select one:
a. exceeds the expected inflation rate.
b. is equal to the expected inflation rate.
c. is less than the expected inflation rate.
d. Neither borrowers nor lenders are better off as the result of unanticipated inflation.

7.In the short run, decreases in the money supply will
Select one:
a. decrease real interest rates.
b. increase real interest rates.
c. may increase or decrease real interest rates.
d. have no effect on real interest rates.

8.What would happen to prices if, for example, all trade unions negotiated long-term higher nominal pay and regular across-the-board increases for workers?
Select one:
a. Prices would remain unchanged.
b. Prices would likely increase.
c. Prices are not affected by nominal salary increases.
d. Prices would likely decrease.

9.As the result of unanticipated inflation, workers are better off while firms are worse off if the actual inflation rate
Select one:
a. is equal to the expected inflation rate.
b. exceeds the expected inflation rate.
c. is less than the expected inflation rate.
d. Neither firms nor workers are better off as the result of unanticipated inflation.

10.If the velocity of money is 4 and nominal GDP is $24 trillion, then the money supply is
Select one:
a. $28 trillion.
b. $20 trillion.
c. $6 trillion.
d. $0.167 trillion.

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Answer the following four questions related to the market for loanable funds.

1. What effect will an increase in the interest rate have on the quantity of loanable funds applied?

a. quantity supplied will increase

b. quantity supplied will decrease

c. Some lenders will offer more while others will offer less.

d. No change in quantity supplied

2. As the interest rate decreases, what happens to the quantity of loanable funds demanded?

a. Some borrowers will demand more and others will demand less

b. quantity demanded will increase

c. No change in quantity demanded

d. quantity demanded will decrease

3. Which of the following acts as a price in the market for loanable funds?

a. Interest rate

b. Capital

c. Demand

d. Supply

4. If the projected rate of return for a project is less than the interest rate for a loan that is necessary to complete the project, how will the borrowing business act?

a. The business will not take the loan

b. The business will take the loan

c. The business will demand more funds to cover the shortfall

d. Business will take the loan irrespective of the interest rate

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ECO 2013 Lecture Notes - Lecture 11: Loanable Funds, Real Interest Rate, Pound Sterling

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