macro chapter 9
You are thinking about buying a new car and will borrow $20,000 for this purchase at a 5 percent fixed rate for exactly one year. The lender (correctly) assumes that inflation will be 2 percent this year. Based on the above information and assuming you adhere to the terms of the loan, you will pay back the lender exactly ________, which will represent ________ of purchasing power.
21,000; $20,600
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.
Why does the demand curve for loanable funds slope downward from left to right?
The higher a loan's interest rate, the fewer firms want the loan.
Assume you put money into an asset that pays you 7 percent interest and inflation is 5 percent. Which statement is correct?
This means the real rate of interest is 2 percent.
If you deposit money in the bank, in essence, you are
a supplier of funds, since the bank simply is an intermediary between those who want to borrow loanable funds and those who are willing to lend them (depositors).
A bond is an instrument that allows the bearer to earn interest. The bearer would be best described as
a supplier of loanable funds.
Assuming the figure represents the market for loanable funds, and that point C represents $40 million and point D represents $70 million, then it would be true that (13)
at interest rate A, there is a shortage of $30 million of loanable funds.
The notion of consumption smoothing means
consumption varies less than income over a person's lifetime. In early life people tend to borrow, in late life people tend to dissave, but in their middle years they tend to save.
Which description implies a drop in interest rates?
either a leftward shift of the demand curve for loanable funds, or a rightward shift of the supply curve
The real interest rate
equals the nominal interest rate minus the inflation rate
The supply of loanable funds comes from
households and is upward sloping.
If interest rates rise,
households that are savers of funds will save more.
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.
Equilibrium in the loanable funds market means the
interest rate at which investment equals savings.
A profit-maximizing firm will borrow money at a given interest rate, and use that money to fund an investment, if and only if the
interest rate is less than the expected rate of return on the investment.
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.
Assuming the figure represents the market for loanable funds, it would be true that (11)
line 1 represents savings (supply), and line 2 represents investment (demand).
Assuming the figure represents the market for loanable funds (10)
line 1 represents savings and point C represents a quantity supplied of loanable funds.
You deposit $1,000 in the bank and leave it for five years at 3 percent 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 but less than $1,500.
Assuming inflation is positive, the real interest rate
must always be smaller than the nominal interest rate.
The demand and supply of loanable funds increase simultaneously. This would cause the equilibrium
quantity of loanable funds to increase, but the effect on the equilibrium interest rate would be uncertain.
We could best describe the
real rate of interest as the inflation-adjusted rate of interest.
Every dollar borrowed
requires a dollar to be saved
The notion of the loanable funds market is the method by which
savers (typically households and individuals) supply funds to borrowers (typically firms).
An increase in the supply of loanable funds means
savers want to save more at every interest rate.
As income and wealth rise, we would expect
savings to increase as people save some of the extra wealth or income they have.
Savings represents
supply of loanable funds
If interest rates rise but the quantity of loanable funds demanded and supplies remains constant, this implies that
the demand for loanable funds decreased while the supply increased.
The nominal interest rate is
the interest rate that is not corrected for inflation.
the interest rate is
the price of loanable funds
Assuming the figure represents the market for loanable funds, it would be true that (9)
the vertical axis represents the interest rate, and the distance between points C and D represents the shortage of loanable funds at interest rate A.
the interest rate is
both a return to savers and a cost to borrowers.
Assuming the figure represents the market for loanable funds, and that point C represents 40 and point D represents 80, then it would be true that (12)
both points represent the quantity of loanable funds and at interest rate A there would be a shortage of loanable funds of 40 units.
The demand for loanable funds increases while the supply of loanable funds remains constant. This would cause
both the equilibrium quantity of loanable funds and the equilibrium interest rate to increase.