ECON Chapter 22

Jermaine lives in a world where the nominal interest rate is 3% and the inflation rate is 1%. Today, Jermaine has $200, with which he could purchase 80 Zaps. However, Jermaine realizes he could also put the money in savings for one year; if he did this, then in one year's time he would have -more dollars, which would allow him to purchase - more Zaps. (Assume that the price change for Zaps reflects the general inflation rate.)

$6; 2%

The graph below depicts the market for loanable funds. Complete the graph by labeling the supply and demand curves and the y-axis of the graph.

%7 - interest rate S = Savings D = Investments

Suppose you know that the equilibrium amount of investment in the global market is $10.4 trillion, the equilibrium interest rate is 5.5%, the income tax rate is 7%, and government spending accounts for 30% of global GDP. What is the equilibrium amount of global savings, in trillions of dollars?

10.4 (The interest rate, tax rate, and government share of GDP are irrelevant. In equilibrium, savings equals investment.)

The graph depicts the U.S. nominal interest rate and real interest rate between 1965 and 2015. Keeping in mind the Fisher equation, click on the time period during which the inflation rate briefly turned negative.

2005 to 2010

Eve earns $68,000 per year as a lecturer. Each year, she spends $36,000. In addition, she gives $1,000 to charity and pays $16,000 in taxes. Of the money she has left, she saves $13,000 and invests $2,000 in the stock market. Calculate her personal savings rate. Round to the nearest whole percentage point.

25% (Saving/after-tax earning * 100)

Given the supply and demand curves shown, where would the interest rate end up if the quantity of loans supplied started out at $200 billion?

5%

Which of the following events results in an increase in the nominal interest rate?

Correct Answer(s): Inflation increases from 2% to 5%, while the real interest rate increases from 0% to 3%. Inflation increases while the real interest rate remains constant. Inflation drops by 2 percentage points, while the real interest rate increases by 3 points.

Which of the following events results in a decrease in the real interest rate?

Correct Answer(s): Inflation rises, while interest paid by banks drops. Inflation increases, while the nominal interest remains the same.

Why is interest typically paid on a loan?

Correct Answers: To compensate lender for temporarily making do without the money that was lent to compensate the lender for the risk that the loan will not be repaid

One line in the graph below describes a typical individual's lifetime pattern of income. The other line describes the typical lifetime pattern of consumption. Label the two lines, keeping in mind the concept of consumption smoothing.

Green line (upper curve) - income Blue line (Lower curve) consumption

Consider the typical individual engaged in consumption smoothing. Match the following phases of that person's life to the financial activity he or she would most likely engage in during that phase.

borrowing Correct label: early life saving Correct label: prime earning years dissaving Correct label: later life

When the loanable funds market is in equilibrium, savings equals -. Above the equilibrium interest rate, the quantity of loanable funds demanded would be lower than the amount people are willing to -, putting - pressure on the interest rate.

investment; save; downward

Going to college means that you give up income in the present so that you earn more in the future. In this sense, college students are - patient than those who work instead. Economists would say this is an expression of - time preferences.

more; weaker