global quiz

If there is an increase in the demand for loanable funds, BUT government regulations do not allow interest rates to change, what will be the outcome?

A shortage of loanable funds will result

If there is an increase in the demand for loanable funds, but government regulations do not allow interest rates to change, what will happen in the loanable funds market?

A shortage of loanable funds will result.

interest rates and the business cycle

confidence increases rates increase confidence decreases rates decrease

households and consumers are not optimistic

consumers are uncertain and do not buy businesses cut back and do not expand decrease in interest rates

inflationary expectations

create uncertainty

causes of decrease in demand

decrease borrowers negative business expectations decreased consumer optimism decreased deficit spending lower inflationary expectation (low price level)

economy contracts

decrease interest rates

pessimistic views of the economy

demand for funds will decrease customers will not purchase durable goods decrease in interest rates

savers

demanders of loanable bonds

negative real return

do not undertake project

business cycles

expansion, contraction, peak, trough

changes in bond market

expectations, government budget deficit

You read a report that tells you the population is falling and this is resulting in a decline in the number of borrowers in the loanable funds market. What will happen to interest rates in New Mexico and why?

The interest rate in New Mexico will fall as the demand for loanable funds falls

Market interest rates are increasing due to increased global political tensions. What impact will this have in terms of the loanable funds model?

The quantity demanded of loanable funds will decrease causing movement up the demand curve of loanable funds.

You read in The Financial Times a story that explains that market interest rates are increasing due to increased global political tensions. What impact will this have in terms of the loanable funds model?

The quantity demanded of loanable funds will decrease causing movement up the demand curve of loanable funds.

default risk premium

The rate at which a lender needs to be compensated for taking on a greater risk of default by the borrower

low price of bonds- supply

high cost of borrowing, high rates, supply few

low price of bonds- demand curve

high rate of return, buy many bonds

increased government deficit

higher interest rates increase borrowing through sale of bonds price falls increase in demand

interest rates on loanable funds

higher interest rates mean more money into loanable funds.. cost of spending is growing therefore there is more saving

economy expands

higher rates

calculate the default risk premium

interest rate on a bond - interest rate on a risk-free bond

"The opportunity cost of current consumption just decreased." In terms of the loanable funds framework, what just happened?

interest rates decreased

The opportunity cost of current consumption just increased. In terms of the loanable funds framework, what does this mean

interest rates increased

causes of decrease in supply of loanable funds

less savers -> higher interest rates lower household wealth -> higher interest rates low inflationary expectations ->low rates contractionary monetary policy -> higher rates

supply for loanable funds

optimal level of consumption is less than income households: save firms: revenue>expenditures government: tax revenue

decreased supply of loanable funds

shortage quantity supplied > quantity demanded

corporations and government

suppliers of loanable bonds

contraction

weak economy with inflation

high price of bonds- demand curve

low rate of return, buy few

high price of bonds- supply

low yield, supply more, borrow more

modern economic growth

lower interest rates lower cost of capital more funded projects more job creation

economy begins to contracts

lower rates

secondary bond market

market for bonds or other debt instruments previously issued

less developed country

more expensive to borrow weak economic growth

The Board of Governors of the Federal Reserve System has decided to pursue a contractionary monetary policy. What impact will that have in terms of the loanable funds market?

Supply of Loanable funds will decrease and interest rates will rise.

If the demand for bonds is increasing, what is happening in terms of loanable funds?

Supply of loanable funds is increasing

American households view their current retirement plans as uncertain and they decide to increase the funds that they are going to put into their retirement accounts. In terms of the loanable funds market, what will be the effect of this change?

Supply of loanable funds will increase.

Suppose you hear on the business news that the Fisher Effect is pushing down bond prices in the United States. What is happening in terms of the Loanable Funds model?

The demand for loanable funds is increasing while the supply of loanable funds is decreasing.

The state of California has had a decrease in tax revenue because of an unexpected decrease in population. As a result, they are facing a $50 Billion deficit. What impact will this have in terms of the loanable funds market?

The demand for loanable funds will increase as California borrows to cover their shortfall.

The government budget deficit increases by $450million dollars, what impact will this have in terms of the loanable funds model?

The demand for loanable funds will increase as the State of Iowa sells more bonds in the primary market.

Consumers and businesses have expectations that inflation rates are going to rise. In terms of the loanable funds framework, which best describes what will happen as a result?

There will be an increase in the demand for loanable funds and an increase in market interest rate.

As a result of uncertainty about the future of the European Union, European investors are looking for alternative investment opportunities. If these funds come to the U.S. markets, how will the loanable funds market react?

There will be an increase in the supply of loanable funds and market interest rates will fall as a result.

Suppose as a result of a strong fourth quarter performance, business profits and cash flows have increased. What will be the effect on the loanable funds markets?

There will be an increase in the supply of loanable funds and thus a decrease in the market interest rate.

causes of increase in supply of loanable funds

more savers -> lower interest rates higher household wealth -> lower interest rates high inflationary expectations -> high rates expansionary monetary policy -> lower rates

change in quantity demanded

movement along demand curve

ex poste rate

nominal - actual

ex ante rate

nominal - expected

demand for loanable funds

optimal expenditure is greater than income households: withdrawl savings firms: expenditures>investments government: budget deficit

shortage

price increases, quantity demanded decreases, supply increases

bond relationship

price= 1 / interest rate

increased supply of loanable funds

quantity demanded > quantity supplies Clear the market: lower price and rates

surplus

quantity demanded increases and quantity supplied decreases

relationship between quantity demanded and interest rates

quantity demanded increases as interest rates decrease

increase in demand for loanable funds

quantity supplied < quantity demanded (shortage) increased prices movement up the demand curve higher interest rates higher equilibrium interest rate

decrease in demand for loanable funds

surplus movement down the curve lower equilibrium interest rates

​The quantity of loanable funds supplied is directly related to interest rates because as interest rates increase

​the opportunity cost of household consumption increases, causing households to bring more of their after-tax income to the pool of loanable funds.

high interest rates

borrow less, cost of capital increases, NPV decreases, reduce funded projects

increase in optimism

increase in demand increase in interest rates economy expands

increase in inflationary expectation

increase in demand for loanable funds decrease in supply of loanable funds higher interest rates

positive economic expectations

increase in demand for loanable funds higher interest rates

households and businesses are optimistic

increase in demand of funds businesses increase investments increase borrowing increase capital projects

causes of increase in demand

increased borrowers increased business optimism increased consumer optimism increased deficit spending rising inflationary expectation (price level)

borrowers

inflation is a benefit to

borrowers: agencies, corporations, government

issuers of bonds

Due to a decrease in the price of petroleum products, wealth levels in Norway are falling. How might this impact corporate capital budgeting decisions in Norway?

As the supply of loanable funds decreases due to the decrease in wealth, market interest rates will rise and thus fewer corporate projects will be funded.

You read in the Financial Times that due to recent discoveries of natural gas, wealth levels in Bolivia are expected to increase rapidly. How might this impact corporate capital budget decisions in Bolivia and why?

As the supply of loanable funds increases due to the increase in wealth, market interest rates will fall and thus more corporate projects will be funded.

In order to end political unrest the Italian government significantly increased its social spending requiring it to greatly increase its amount of borrowing. At the same time, the European Central Bank that sets monetary policy for Italy was pursuing an expansionary monetary policy. If the Italian government borrowing was much larger than the ECBs monetary policy intervention, what do you expect will happen to bond price and interest rates in Italy?

Bond prices will fall and interest rates will increase.

An increase in interest rates will impact business investment spending in what way?

Business investment spending will fall as the Net Present Value of projects falls.

If businesses expect lower Net Present Value on their projects while at the same time consumer wealth levels are falling, what will happen to interest rates in terms of the loanable funds model?

Change in interest rates is undetermined as the demand for loanable funds and the supply of loanable funds are both falling.

If businesses expect higher Net Present Value on their projects and at the same time consumer wealth levels are rising, what will happen to interest rates in terms of loanable funds?

Change in interest rates is undetermined because both the demand for loanable funds and the supply of loanable funds are rising.

Due to increased political stability across Europe the relative riskiness of German bonds has decreased. What impact will this have on the German bond market and the loanable funds market in Germany?

Demand for bonds will increase and the supply of loanable funds will increase.

You have been told that your company has decided to undertake a variety of new capital projects. In terms of the loanable funds model, which of the following most likely happened?

Interest rates decreased causing an increase in the quantity demanded of loanable funds.

Firms are deciding to cut funding of projects and are thus borrowing less. In terms of the loanable funds model, which of the following most likely happened?

Interest rates increased causing a decrease in the quantity demanded of loanable funds

One of the impacts of the Arab Spring is that Libya is able to access the global financial markets. This will mean an increase in the number of foreign borrowers in Libyan financial markets as well as a large increase in the level of household wealth in Libya. From this, what you expect to happen to market interest rates and bond prices in Libya if the first change is smaller than the second?

Interest rates will decrease and bond prices will rise.

This is an expansionary monetary policy move. The Times also reported a small increase in British consumer confidence. If the size of the monetary policy action is bigger than the change in consumer confidence, what do you expect will happen to interest rates and bond prices in England?

Interest rates will fall and bond prices will increase

A state has decided to partially subsidize business hiring in the state. Firms MUST pay for the rest of the labor costs not covered by the subsidy. At the same time household wealth levels across the state are falling. What will happen to interest rates according to the loanable funds framework?

Interest rates will increase as the demand for loanable funds increases while the supply of loanable funds decreases.

Wisconsin is going to have issue bonds to fund its growing budget deficit, while at the same time out-of-state savers are pulling their savings out of Wisconsin banks. You determine the first affect will be larger than the second. According to the Loanable Funds framework, what do you think will happen to interest rates in Wisconsin and why?

Interest rates will rise as the demand for loanable funds increases more than the supply of loanable funds decreases.

As interest rates increase, American households increase the amount of funds they dedicate to retirement savings and reduce their level of spending. What impact does this have in terms of the loanable funds model?

Quantity supplied of loanable funds increase