Chapter 7

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If the nominal interest rate is 5 percent per year and the inflation rate is 2 percent a​ year, the real interest rate is​ _____ per year

3

If the annual interest paid on a​ $500 loan is​ $25, the nominal interest rate is​ _____ percent per year.

5

The demand for loanable funds increases and the supply of loanable funds decreases.

As a​ result, the equilibrium real interest rate​ rises and the equilibrium quantity of loanable funds​ increases,​ decreases, or remains the same.

The demand for loanable funds increases and the supply of loanable funds increases.

As a​ result, the equilibrium real interest rate​ rises, falls, or remains the same and the equilibrium quantity of loanable funds​ increases.

An increase in the real interest rate will:

cause a movement along the demand curve for loanable funds

federal reserve system

central bank of the US -regulates private banks and the monetary system

A decline in investment spending as a result of an increase in government spending and borrowing is known as:

crowding out

if increases in government budget deficits cause investment spending to fall it is known as:

crowding out

the decline in capital's value over a period of time is known as

depreciation

The best measure of the income households actually have available to spend is

disposable personal income

A government budget surplus​ _______ the real interest​ rate, decreases​ ______.

​lowers; private​ saving, and increases investment

A government budget deficit​ _______ the real interest​ rate, increases​ ______.

​raises; private​ saving, and decreases investment

Net present value is the:

present value of all the future flows of money that arise from a financial decision minus the initial cost of the decision

default risk

probability that a loan will not be repaid

The federal government deficit and mounting debt​ _______.

raise the real interest​ rate, decrease​ investment, and slow economic growth

According to the​ Ricardo-Barro effect,

rational taxpayers know that a budget deficit today means that future taxes will be higher and future disposable incomes will be smaller.

According to the​ Ricardo-Barro effect, when a government budget deficit occurs​ today, ______.

saving​ increases, the supply of loanable funds​ increases, and the real interest rate does not change

supply of loanable funds

the relationship between the quantity of loanable funds supplied and the real interest rate when all other influences on lending plans remain the same

credit risk or default risk

the risk that a borrower, also known as a creditor, might not repay a loan

national saving

the sum of private saving and government saving =S+(T-G) save is S, net taxes is T

if the government begins running a budget surplus, what impact will the surplus have on the loanable funds market?

the supply of loanable funds will increase

How could a reduction in income tax rates affect the loanable funds market?

the supply of loanable funds would increase

crowding-out effect

the tendency for a government budget deficit to raise the real interest rate and decrease investment

crowded-out efect

the tendency for a govt budget deficit to raise the real interest rate and decrease investment

gross investment

the total amount spent on new capital

net worth

the total market value of what a financial institution has lent minus the market value of what it has borrowed

wealth

the value of all things that people own

net present value

the value today of all future flows of money from a financial decision minus the initial cost of the decision

What determines the supply of loanable funds?

the willingness of households and governments to save

stock markets

where stocks are traded

If the inflation rate is 6% and the nominal rate of interest is 4%, then the real interest rate is:

-2%

What determines the supply of loanable funds and what makes it​ change?

-The supply of loanable funds is determined by the saving decisions of households, which are influenced by the real interest​ rate, disposable​ income, expected future​ income, wealth, and default​ risk. -The supply of loanable funds changes when disposable​ income, expected future​ income, wealth, or default risk change

the states rate of interest on a loan is the

nominal interest rate

How do households make saving decisions?

The greater a household's disposable income and the smaller a household's expected future income, the greater is the amount that a household decides to save

share of stock

a certificate of ownership and claim to the firm's profits

stock

a certificate of ownership and claim to the profits that a firm makes

what is an example of a financial institution?

a commercial bank

financial institution

a firm that operates on both sides of the markets for financial capital: It borrows in one market and lends in another

mortgage

a legal contract that gives ownership of a home to the lender in the event that the borrower fails to meet the agreed loan payments (repayments and interest)

What is the relationship between real interest rates and investment, other things being equal?

a negative relationship

bond

a promise to make specified payments on specified dates

ricardo-barro effect

an idea by two economists that maybe the government budget does not actually affect the interest rate or investment after all.

what is a financial instruments that represent promises to repay a fixed amount of funds?

bonds

real interest rate=

nominal interest rate - inflation rate

the financial capital markets exist in order to

funnel households savings to firms

present value=

future value in one year / (1 + r) r is the interest rate expressed as a proportion

The flow of funds from ______ into the financial system makes it possible for government and firms to borrow

households

bond markets

if you buy a bond, you could hold it until all payments have been made or you could instead sell it to someone else at any time. bonds are traded in bond markets

a federal government budget deficit will:

increase the demand for loanable funds and increase the equilibrium interest rate

A government budget deficit​ _______ loanable funds.

increases the demand for

A government budget surplus​ _______ loanable funds.

increases the supply of

if the government is attempting to spur investment spending it should adopt policies that are designed to:

lower interest rates

what is the relationship between investment and real interest rates, all other things being equal?

lower interest rates stimulate investment

The _____ the interest rate, the more investment projects firms can profitably undertake, and the ____ the quantity of loanable funds the will demand.

lower; greater

State the financial decision​ rule: If the net present value is positive​ _______ and if the net present value is negative​ _______.

take the action; do not take the action

real interest rate

takes the nominal interest rate and adjusts it to remove the effects of inflation

net taxes

taxes paid to the government minus the cash transfers received from governments = taxes paid - cash transfers received

loanable funds market

the aggregate of all the individual financial markets

in the long run, the amount of investment a firm can make is dependent on:

the amount of household savings

saving

the amount of income that is NOT paid in net taxes or spent on consumption goods and services

Net investment

the change in the value of capital

How can the change in US wealth differ from US saving?

the change in wealth includes changes in the prices of assets owned and saving excludes these items

if technology change increases the profitability of new investment to firms, what will occur?

the demand for loanable funds will increase

financial capital

the funds that firms use to buy physical capital and that households use to buy a home or to invest in human capital

If there is zero inflation:

the nominal interest rate is equal to the real interest rate

demand for loanable funds

the relationship between the quantity of loanable funds demanded and the real interest rate when all other influences on borrowing plans remain the same


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