Economics Module 29

If a one-year project costs $100,000 and is expected to return the firm $105,000, then the rate of return of the project is:

5%.

Use the "Market for Loanable Funds with Government Borrowing" Figure 29-7. According to the accompanying figure, after an increase in government borrowing, the new equilibrium interest rate will rise from ______ and the amount of private savings will _______.

6% to 8%; rise

Suppose the lender expects a real interest rate of 6% and the inflation rate is expected to be 3%. In this case, the nominal interest rate is equal to:

9%.

A business will want to borrow to undertake an investment project when the rate of return on that project is

greater than the interest rate.

Use the "Market for Loanable Funds II" Figure 29-6. If the interest rate is _____ than ______, then the quantity supplied of loanable funds will _______ the quantity of loanable funds demanded.

greater; 8%; be greater than

Use the "Market for Loanable Funds II" Figure 29-8. A decrease in government borrowing will shift the demand for loanable funds to the:

left and decrease the interest rate.

Use the "Market for Loanable Funds II" Figure 29-9. A decrease in savings by the private sector will shift the supply of loanable funds to the:

left and increase the interest rate.

The supply of loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity supplied of loanable funds.

upward; savers; decreasing

All other things unchanged, an increase in loanable funds demand would most likely be caused by a(n):

important economic forecast predicting solid economic growth.

Use the "Loanable Funds Market" Figure 29-3. If the interest rate is 8%, businesses will want to borrow approximately:

$2 trillion.

Use the "Loanable Funds Market" Figure 29-3. If the interest rate is 8%, people will want to save approximately:

$4 trillion.

Crowding out means:

private investment decreases when the government borrows.

Crowding out negatively affects the economy by:

reducing investment spending on physical capital.

If in an open economy, a country imports more than it exports and the government budget deficit increases:

the change in interest rates is ambiguous, but the amount of borrowing will increase.

An expectation that perceived business opportunities will increase will generally cause:

the demand for loanable funds to increase.

The Fisher Effect states that:

the expected real rate of interest is unaffected by the change in expected inflation.

Use the "Loanable Funds" Figure 29-1. The accompanying graph shows the market for loanable funds in equilibrium. Which of the following might produce a new equilibrium interest rate of 5% and a new equilibrium quantity of loanable funds of $150?

Businesses have become more optimistic about the return on investment spending.

Use the "Loanable Funds" Figure 29-1. The accompanying graph shows the market for loanable funds in equilibrium. Which of the following might produce a new equilibrium interest rate of 8% and a new equilibrium quantity of loanable funds of $150?

Businesses have become more optimistic about the return on investment spending.

Expansionary monetary policies will ______ interest rates and _______ savings in the short run.

decrease; increase

The demand for loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity demanded of loanable funds.

downward; savers; increasing