Chapter 2: Determination of Interest Rates

The real interest rate can be forecasted by subtracting the _____ from the ______ for that period.

expected inflation rate; nominal interest rate

Other things being equal, a smaller quantity of U.S. funds would be demanded by foreign governments and corporations if their domestic interest rates were high relative to U.S. rates.

false

The federal government demand for loanable funds is said to be interest elastic

false

The large foreign supply of funds to the U.S. market is partially attributed to the...

high foreign saving rates

Concerning business demand for loanable funds, the required return to implement any given project will be ____ if interest rates are _____.

higher, higher or lower, lower

A _____ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing a _____ shift in the demand schedule.

higher; outward

According to your text, the largest sector supplying loanable funds is the ____ sector.

household

Other things being equal, a _____ quantity of U.S. funds would be demanded by foreign governments and corporations if their domestic interest rates were ______ relative to U.S. rates.

larger; High

The ________ suggests that the market interest rate is determined by factors that control the supply and demand for loanable funds.

loanable funds theory

Household represent a ______ of loanable funds, whereas government and businesses are _____ of loanable funds.

net supplier; net demanders

If the federal government needs to borrow less funds, this borrowing reflects a(n) _____ in the supply of loanable funds and a(n) ______ in the demand for loanable funds.

no change; decrease

A higher federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an outward shift in the demand schedule.

true

In general, suppliers of loanable funds are willing to supply more funds if the interest rate is higher.

true

If the economy strengthens, there is ____ pressure on interest rates. If the Federal Reserve decreases the money supply there is ____ pressure on interest rates (assume that inflationary exceptions are not affected).

upward; upward

When there are expectations of lower inflation in the future, we would typically expect the supply of loanable funds to ___ and the demand for loanable funds to...

increase; decrease

Assume that foreign investors who have invested in U.S. securities decide to increase their investment in U.S. securities. This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S Interest rates.

increase; downward

If economic expansion is expected to increase, then demand for loanable funds should ____ and interest rates should...

increase; increase

If the aggregate demand for loanable funds increases without corresponding _____ in aggregate supply, there will be a _____ of loanable funds.

increase; shortage

The nominal interest rate is 8 percent, and the expected inflation rate is 2 percent. According to the fisher effect, what is the real interest rate?

6 percent

If the real interest rate was large during the last year, then...

Actual inflation was less than the nominal interest rate

As a result of less favorable economic conditions, there is a(n) ______ demand for loanable funds, causing an ______ shift in the demand curve.

Decreased; inward

If the aggregate demand for loanable funds increases without a corresponding increase in aggregate supply, there will be a surplus of loanable funds.

False

The business demand for funds resulting from short-term investments is inversely related to the number of projects implemented and inversely related to the interest rate.

False

If the aggregate supply for loanable funds increases without a corresponding _____ in aggregate demand, there will be a _______ of loanable funds.

Household

Who is the largest supplier for loanable funds?

Households, but it is also supplied by some government units that temporarily generate more tax revenues than they spend or by business's that have cash inflows that are greater than outflows.

The federal government demand for funds is said to be interest inelastic, or ______ to interest rates.

Insensitive

Interest Inelastic

Insensitive to interest rates (The federal government's demand for funds, municipal bonds are sensitive to interest rates )

Household Demand for Loanable Funds

Inverse relationship between the interest rate and the quantity of loanable funds demanded. DOWNWARD SLOPING

Which of the following conditions would place the most downward pressure on interest rates?

an increase in the supply of loanable funds and a decrease in the demand for loanable funds.

Other things being equal, foreign governments and corporations would demand _____ U.S. funds if their local interest rates were suddenly higher than U.S. rates. For a given foreign interest rate level, foreign demand for U.S. funds is _____ related to U.S. interest rates.

More; Inversely

Real Interest Rate

Nominal interest rate adjusted for inflation

Crowding-out effect

Phenomenon that occurs when insufficient loanable funds are available for potential borrowers, such as corporations and individuals, as a result of excessive borrowing by the treasury. Because of limited loanble funds are available to satisfy all borrowers, interest rates rise in response to the increased demand for fund, thereby crowding some potential borrowers out of the market.

Fisher Effect

The nominal interest payments compensate savers in two ways. 1. They compensate for a saver's reduced purchasing power. 2. They provide an additional premium to savers for forgoing present consumption

Interest Rate

The rate (expressed as a percentage of borrowed funds) to be paid by the debtor to the creditor on a periodic (such as annual) basis until the funds are repaid.

The aggregate demand for loanable funds

The sum of the quantities demanded by the separate sectors at any given interest rate

Loanable funds theory

Theory that suggests the market interest rate is determined by the factors controlling the supply and demand for loanable funds.

If economic conditions become more favorable, then...

There would be additional acceptable business projects

Why do governments request loanable funds?

When planned expenditures cannot be completely covered by its incoming revenues from taxes and other sources

According to the Fisher effect, if the real interest rate is zero, the nominal interest rate must be equal to the expected inflation rate.

True

According to your text, while the expected impact of an increased expansion by businesses is an outward shift in the demand schedule, there is no obvious change in the supply schedule.

True

At any point in time, household and businesses demand a greater quantity of loanable funds at lower rates of interest.

True

Forecasters should consider future plans for corporate expansion and the future state of the economy when forecasting business demand for loanable funds.

True