Chapter 7
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