ECON 002 Lecture Notes - Lecture 12: Loanable Funds, Real Interest Rate, Autarky

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1 Aug 2018

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The investment demand curve and its negative relationship with r. When the benefits of increasing capital are greater than the costs (mpk>r), firms will invest more. The lower the interest rate, the more capital a firm will want. Viceversa, the higher the interest rate the higher is the cost of acquiring capital so the less investment. There is a negative relationship between investment (i) and the real interest rate (r). Demand curve often also called the demand for. *we will assume that borrowing rates = lending rates = r. The supply of loanable funds simply comes from national savings, mostly through banks (which we are going to study later) and other financial intermediaries. The important thing is that, as in every market, in a closed economy, we must have that in the financial market: Is curve = s = i + nx.

Related Questions

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. 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.

greenwildebeest673

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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ECON 002 Lecture Notes - Lecture 12: Loanable Funds, Real Interest Rate, Autarky

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