ECON 102 Lecture Notes - Lecture 8: Loanable Funds

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9 Jul 2020

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Def: loanable funds market in which those who want to save supply funds and those who want to borrow or invest demand funds. The supply of loanable funds comes from those who spend less than they earn, either through financial markets or financial intermediaries. The demand of loanable funds comes from households and firms who want to borrow funds to make investments. Families generally invest in new homes while firms may borrow to purchase new equipment or to build factories. The price of a loan is the interest rate: Suppose that the government changes the tax code to encourage greater savings. This will cause an increase in savings, shifting the supply of loanable funds to the right. The equilibrium rate will fall and the equilibrium quantity of loanable funds will rise. Resulting in a decrease of the equilibrium rate and greater savings and investments.

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When the supply of loanable funds exceeds the demand for loanable funds, households want to save ______ than firms want to invest, and the interest rate ______.

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Businesses demand loanable funds because:

A. loanable fund interest rates are always lower than the rate of return on their new investments.
B. firms need to borrow funds so that they can pay the wage costs and other recurring expenses of the business.
C. households charge a much higher rate of interest than the going rate of interest in the loanable funds market.
D. firms need to borrow funds for new projects, such as building new factories or carrying out new research projects.

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6. 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.

7. We associate the term debt finance with

a.	the bond market and we associate the term equity finance with the stock market.
b.	the stock market and we associate the term equity finance with the bond market.
c.	financial intermediaries and we associate the term equity finance with financial markets.
d.	financial markets and we associate the term equity finance with financial intermediaries.

8. If the demand for loanable funds shifts to the right, then the equilibrium interest rate

a.	and the quantity of loanable funds rises.
b.	and the quantity of loanable funds falls.
c.	rises and the quantity of loanable funds falls.
d.	falls and the quantity of loanable funds rises.

9. Long-term bonds are

a.	riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
b.	riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.
c.	less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds.
d.	less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

10. Compared to bondholders, stockholders

a.	face higher risk and have the potential for higher returns.
b.	face higher risk but receive a fixed payment.
c.	face lower risk and have the potential for higher returns.
d.	face lower risk but receive a fixed payment.

11. The old adage, 'don't put all your eggs in one basket', is very similar to a modern bit of advice concerning financial matters:

a.	Buy low-risk bonds.
b.	Use a medium of exchange.
c.	Diversify.
d.	Intermediate.

12. A budget surplus is created if

a.	the government sells more bonds than it buys back.
b.	the government spends more than it receives in tax revenue.
c.	private saving is greater than zero.
d.	None of the above is correct.

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ECON 102 Lecture Notes - Lecture 8: Loanable Funds

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