econ ch 9

The notion of consumption smoothing means

consumption varies less than income over a person's lifetime. In early life people tend to borrow, in late life people tend to dissave, but in their middle years they tend to save.

what do lower interest rates lead to?

greater quantity demanded for loanable funds

investor confidence

is a measure of what firms expect for future economic activity

interest rate

is a price of loanable funds, quoted as a percentage of the original loan amount

savings rate

is personal saving as a portion of disposable (after-tax) income

nominal interest rate

is the interest rate before it is corrected for inflation

real interest rate

is the interest rate that is corrected for inflation

loanable funds market

is the market where savers supply funds for loans to borrowers

when decision makers at firm lose confidence in the future direction of the economy what happens to demand?

it declines and lower investment is the result

if income and wealth increase, time preferences fell, and a large population moves into midlife what happens?

it would all increase savings moving it to the right

if income and wealth decrease, time preferences rise, and no one moves into midlife what happens?

it would decrease savings and move it to the right

higher inflation rates lead to higher?

nominal interest rates

equilibrium

occurs at the interest rate where the plans of savers match the plans of borrowers

consumption smoothing

occurs when people borrow and save in order to smooth consumption over their lifetime

dissaving

occurs when people withdraw funds from their previously accumulated savings

what factors shift demand for loanable funds?

productivity of capital and investor confidence

time preferencing

refers to the fact that people prefer to receive goods and services sooner rather than later

If the demographics of a nation change and the average age of the nation is approaching middle age, we would expect

savings to increase

As income and wealth rise, we would expect

savings to increase as people save some of the extra wealth or income they have

fisher equation

states that the real interest rate equals the nominal interest rates minus the inflation rate

what happens when baby boomers retire and draw down their savings?

supply loanable funds market will decrease

If the U.S. economy experiences a major recession, then

the demand for loanable funds will shift left

if capital is more productive what happens to demand?

the demand for loans increase; if it is less productive the demand for loans decrease

The demand for loanable funds decreases while the supply simultaneously increases. This would cause:

the equilibrium interest rate to decrease, but the new equilibrium quantity would be uncertain.

If household wealth rises and capital becomes less productive, we would correctly say that:

the new equilibrium quantity of loanable funds would be indeterminate, but we would be certain the new equilibrium interest rate would be less than the original.

law of supply for loanable funds

the quantity of savings rises when the interest rates rises

Assume foreign incomes rise. Ceteris paribus (all things equal), this would cause:

the supply of loanable funds to increase.

If time preferences increase

the supply of loanable funds will decrease.

One could correctly argue that higher capital productivity

would increase the value of capital and the demand for loanable funds

You borrow $10,000 today at a nominal rate of 5%; inflation for the past 10 years has been exactly 2%. Today, inflation instantly rises to 4% and stays that way for the duration of your loan. Based on the above information and all else being equal, today

you are better off because you are paying back the loan with dollars that represent less purchasing power today than the dollars you borrowed before

what factors shift supply of loanable funds?

Income and wealth, time preferences, consumption smoothing

Which combination of events could have caused the equilibrium interest rate to fall and the equilibrium quantity of loanable funds (both borrowed and lent) to rise?

More individuals are middle aged, and wealth increases

The demand for loanable funds increases while the supply of loanable funds remains constant. This would cause:

both the equilibrium quantity of loanable funds and the equilibrium interest rate to increase.

if investor confidence rises what happens to demand

demand for loanable funds increases and the demand curve moves to the right.

Since firms are the primary

demanders of loanable funds, they must borrow from households