Econ. Unit 4 Lesson 1

If everyone began feeling better about the economic future:

"animal spirits" would become more positive and firms would invest more, causing the demand for loanable funds to increase.

You deposit $1,000.00 into an asset that pays 7% annual interest for eight years. At the end of the eight years, you would have:

$1,718.19.

You deposit $600 in a savings account in your bank for a year. By the end of the year the value of your deposits increases to $625. What is the interest rate that your bank is offering on the savings account?

4.16%

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

A baby boom begins, and people have higher time preferences.

Put the phrases in order from first to last to best illustrate the progression of a properly functioning loanable funds market.

Borrowing requires saving; investment requires borrowing; output (GDP) requires investment

You deposit $500.00 into an asset that pays 10% annual interest for three years. At the end of the three years, you would have:

$665.50.

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 7% and stays that way for the duration of your loan. Based on the above information, ceteris paribus (all else equal), today:

the real rate of interest on your loan is now -2%.

Savings is:

the supply of loanable funds and is upward sloping.

If the federal government taxes the interest rate that savers receive:

the supply of loanable funds decreases.

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.

Savings represents:

the supply of loanable funds.

Most people have a time preference. Since this is true:

they must be paid interest to consume later (save now) and are willing to pay interest to consume now (save later).

If life expectancy falls due to AIDS and other diseases, we would expect:

time preference to rise and savings to 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.

You are an entrepreneur about to start your first business. Based on this statement:

you are most likely to be a borrower concerned mostly about the real interest rate you will pay.

Your roommate arrives home and says, "I am so hungry, I would give up my iPhone for a bowl of chili right now." You say, "Here is the chili—let's trade." Based on this information:

you have a lower time preference than your roommate because he gets the chili now.

_____ _____ are the demanders for loanable funds.

Firms and governments

An interest rate best represents _______________ to borrowers and _______________ to savers.

cost; return

The presence of secondary markets ______________ the interest rates that firms have to pay on bonds issued by them.

decreases

When people withdraw funds from their savings, economists call this:

dissaving.

The correct production timeline is:

dollars are borrowed, investment occurs, and output is produced.

What factor(s) shift the supply curve of loanable funds?

Income and wealth

A non-price determinant of the supply of loanable funds would be:

a change in the level of household time preferences.

The real interest rate:

equals the nominal rate minus the rate of inflation.

Imagine you live on the planet Krypton. The loanable funds market on Krypton is thriving and life is good. However, the planet is very, very old and the great scientists and philosophers on the planet have begun discussing openly that the planet may be on the verge of destruction. Even if the great thinkers are wrong, the loanable funds market will change in the short term. Specifically, the supply of loanable funds is expected to ____________ and as a result the amount of economic output in the future is expected to _______________.

fall; decrease

Assume an epidemic hits a nation hard. As a result, people now have lower life expectancies. The most likely result would be: (hint: the period of mid-life will be shorter)

a lower supply of loanable funds.

The real interest rate in 2012 was:

a negative number.

One argument that is made concerning the low rate of saving in the United States is that:

although savings is at almost historically low levels, the savings rate conceals the "hidden savings" from peoples' equity in their homes.

If interest rates rise, holding all else constant, this would cause:

an increase in the quantity supplied of loanable funds but a decrease in the quantity demanded of loanable funds.

If interest rates fell between 1981 and 2012, then:

quantity demanded of loanable funds increased.

The Fisher equation:

relates real interest rates, nominal interest rates, and inflation.

An increase in the supply of loanable funds means:

savers want to save more at every interest rate.

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

savings to increase.

Assume that the residents of a nation become more patient (experience a reduction in their time preferences). In the long run, how will the lower time preferences affect the levels of capital and income growth in that nation?

Capital and income growth will both increase.

Use the Fisher equation to fill in the blanks in the following table.

Inflation rate, 5%; Real interest rate, 4%; Nominal interest rate, 4%

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.

Two nations are located next to one another. In Nation A, people are very thrifty and spend much less than their incomes; moreover, Nation A's government runs a balanced budget every year. In Nation B, people spend all of their income, but their government runs consistent deficits. Thus:

Nation A's extra savings would increase the supply of loanable funds to Nation B.

What occurs when the loanable funds market is in equilibrium?

Savings = Investment

What's happened to the savings rate in the U.S. since 1980?

Savings are lower now than in 1980.

Which of the following reflects an accurate economic chain of events?

Savings finances investment, which allows the economy to grow from a larger capital stock.

Smiley Myrus owns a large corporation that is building a new shopping mall in Winston-Salem, North Carolina. In all likelihood:

Smiley's firm is a borrower of loanable funds.

T. D. Goneworth, a financial services firm, makes people want their money and want it now. If the firm is successful in advertising this message and convinces people to believe it, then, all else equal:

T. D. Goneworth has caused people to increase their time preferences.

Suppose that capital becomes more productive. What would we expect to happen?

The equilibrium interest rate and amount invested would both increase.

Assume you put money into an asset that pays you 7% interest and inflation is 5%. Which statement is correct?

This means the real rate of interest is 2%.

Which description best indicates a fall in interest rates?

This would be shown by a downward movement along both the demand and supply curves for loanable funds.

The timeline of production would indicate:

firms first invest (which is borrowing), then they produce, and then the revenue they receive is used to pay resource suppliers and lenders.

Borrowers in the loanable funds market consist of:

governments and firms.

The measurement of personal savings may be distorted by:

greater levels of home equity.

Stewart Shopaholic, a compulsive shopper who likes to spend a lot of money all the time:

has a high time preference.

A young girl is saving money for a soccer ball but is tempted to buy a book. If the girl buys a book rather than continuing to save for the ball:

he girl has exchanged low time preferences for high.

Typically, savers in the loanable funds market are the _________, and borrowers are _________.

households and foreign entities; firms and the (U.S.) government

The supply of loanable funds comes from:

households and is upward sloping.

Which of the following is an example of direct finance? I. Apple stocks II. Microsoft bonds III. A savings account in Citibank

i and ii

The notion of compound interest means that:

if you leave a lump sum (some dollar amount) in the bank for some period, it will accumulate interest both on the principal and on any accumulated interest.

Automobile manufacturers are planning to adopt a new technology that will increase their overall productivity by 30%. As a result, the amount of equilibrium investment will ________________ and equilibrium interest rate will _________________ in the loanable funds market.

increase; increase

If real rates were higher than nominal rates in 2009, the implication is that:

inflation was negative (deflation was occurring).

By 1981:

interest rates were about 15%.

Businesses became more pessimistic during the Great Recession of 2007-2009. As a result:

investment demand fell.

The demand for loanable funds is:

investment, because firms are (on the aggregate) net borrowers.

Gross domestic product requires:

investment, which requires borrowing, which requires a functioning loanable funds market.

Based on the relationship between consumption and income, someone in their "prime earning years":

is most likely a saver.

Assume inflation is occurring in a nation; the implication(s):

is that the nominal interest rate exceeds the real interest rate.

If a depositor puts money in the bank, the interest rate that the bank will pay the depositor:

is the nominal rate of interest.

Inflation reached its peak (of at least 14%) in the late 1970s/early 1980s. If this statement is true, then:

it is certain the nominal rate of interest was greater than the real rate.

Typically a college degree is "worth it," but it requires:

low time preferences.

You deposit $1,000.00 in the bank and leave it for five years at 3% annual interest making no additional transactions on this account. At the end of the five years, you withdraw the principal and any accumulated interest; the amount you would withdraw would be:

more than $1,150.00 but less than $1,500.00.

Assuming inflation is positive, the real interest rate:

must always be smaller than the nominal interest rate.

In the following scenario, identify whether the supply or demand curve shifts in the loanable funds market, and in what direction. A change in Americans' habits makes people less patient and more susceptible to instant gratification, causing their time preferences to become stronger.

supply curve shifts left

Suppose that U.S. citizens suddenly become wealthier. As a result, the ____ for/of loanable funds ____, and borrowers are able to issue ____ stocks and bonds to finance capital improvements.

supply; increases; more

A young boy is saving money for a baseball bat but is tempted to buy an ice cream cone. If the boy successfully resists buying ice cream and continues to save for the bat:

the boy has exchanged high time preferences for low.

You work as a consultant to firms deciding whether to borrow funds to invest in new projects. For each of your clients listed in the table, suppose that you have determined the interest rate they can borrow at, and also the expected rate of return on their investment. Which of these firms should you tell to go ahead with their investment?

the cafe, the soccer team, the candy company

The interest rate represents _________ to _________ and _________ to _________

the cost of borrowing; firms and governments; a reward to saving; households

Firms expect more sales and profits in the near future; this would cause:

the demand for loanable funds to increase.

The government engages in more deficit spending. Ceteris paribus (all else equal), this would cause:

the demand for loanable funds to increase.

The demand for loanable funds increases by the exact same percentage that the supply of loanable funds decreases. This would cause:

the equilibrium interest rate to increase, but the equilibrium quantity would remain unchanged.

The demand and supply of loanable funds decrease simultaneously. This would cause:

the equilibrium quantity of loanable funds to decrease, but the effect on the equilibrium interest rate would be uncertain.

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

the equilibrium quantity of loanable funds to increase and the equilibrium interest rate to decrease

Equilibrium in the loanable funds market means:

the interest rate at which investment equals savings.

The nominal interest rate is:

the interest rate that is not corrected for inflation.

The notion of the loanable funds market is:

the method by which savers (typically households and individuals) supply funds to borrowers (typically firms).

If foreign entities save less and governments run more deficits, 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 higher than the original.

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.

If foreign entities save more and businesses become more optimistic about the future, we would correctly say that:

the new equilibrium quantity of loanable funds would increase, but we would be unable to tell if the new equilibrium interest rate would be higher or lower than the original.

The interest rate represents:

the opportunity cost of consumption.

We could best describe:

the real rate of interest as the inflation-adjusted rate of interest.