Econ Chapter 7

Firms investment decisions

- firms invest in capital only if they expect to earn a profit - fewer projects are profitable at a higher real interest rate that at a low real interest rate - the higher the real interest rate the smaller is the quantity of loanable funds demanded other things remaining the same

Decrease in expected profit

Decreases the demand for loanable funds and brings a leftward shift of the demand for loanable funds curve

An increase in current income taxes

Decreases the supply of global fund say because it decreases disposable income which decreases saving

Loanable funds flow among countries because

Funds flow into the country with the highest real interest rate and out of the country in which the real interest rate is lowest

The loanable funds market is

The aggregate of all the individual financial market

Demand for loanable funds increases and the supply of loanable funds increases

The equilibrium real interest rate rises and the equilibrium quantity of loanable funds increases, decreases, or remains the same

The real interest rate is opportunity cost of loanable funds because

The real interest paid on borrowed funds is opportunity cost of borrowing and the real interest rate forgone is the opportunity cost of not saving or not lending those funds

The demand for loanable funds is determined by

The real interest rate and expected profit

The demand for loanable funds changes when

expected profit changes

If a country has a shortage of loanable funds at the world real interest rate

world suppliers of loanable funds move funds to this country

A government budget surplus ________ the supply loanable funds. The real interest rate _____, ______, decreases and ______ increases

Increases; falls; private savings; investment

A government budget deficit ________ the demand for loanable funds. The real interest rate ________, ________ increases, and _________ decreases.

Increases; rises; private saving; investment