Question 1

Every ____________ requires a ____________.

Accepted Answer

A)   savings dollar; foreign investment dollar
B)   investment dollar; savings dollar
C)   dollar of loanable funds; dollar of wages earned
D)   dollar of government borrowing; dollar of foreign borrowing
E)   dollar of exports; dollar of importsF) A) and C)
G) B) and D)

Question 2

The interest rate represents:

Accepted Answer

A)   the opportunity cost of saving.
B)   the opportunity cost of consumption.
C)   the opportunity cost of saving plus the opportunity cost of inflation.
D)   only the opportunity cost of taking a different job.
E)   the price of savings, but not investment.F) B) and E)
G) All of the above

Question 3

As income and wealth rise, we would expect:

Accepted Answer

A)   savings to increase as people save some of the extra wealth or income they have.
B)   savings to fall, since people would spend the extra income or wealth.
C)   interest rates to rise.
D)   foreigners with more wealth to move their assets out of the United States to foreign markets.
E)   people to have a negative rate of time preference.F) D) and E)
G) B) and C)

Question 4

The real interest rate in 2012 was:

Accepted Answer

A)   about 9%.
B)   about 7%.
C)   about 5%.
D)   about 3%.
E)   a negative number.F) A) and E)
G) A) and D)

Question 5

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:

Accepted Answer

A)   $1,000.00.
B)   $1,030.00.
C)   $1,150.00.
D)   more than $1,150.00 but less than $1,500.00.
E)   more than $1,500.00.F) B) and D)
G) D) and E) D

Question 6

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

Accepted Answer

A)   Smiley's firm is a supplier of loanable funds.
B)   Smiley's firm pays a higher rate of interest than most borrowers, based on the Fisher equation.
C)   Smiley's firm is a borrower of loanable funds.
D)   Smiley's firm pays a lower rate of interest than most borrowers, based on the Fisher equation.
E)   Smiley's firm would loan its profits to foreign entities.F) A) and B)
G) A) and D)

Question 7

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

Accepted Answer

A)   an increase in both the demand and supply of loanable funds.
B)   a decrease in both the demand and supply of loanable funds.
C)   an increase in the supply of loanable funds but a decrease in the demand for loanable funds.
D)   an increase in the quantity supplied of loanable funds but a decrease in the quantity demanded of loanable funds.
E)   an increase in the supply of loanable funds but a decrease in the demand for loanable fundsF) C) and D)
G) None of the above

Question 8

The timeline of production would indicate:

Accepted Answer

A)   supply creates its own investment.
B)   first production occurs, then profit represents a residual, and this residual is saved.
C)   firms first invest (which is borrowing) , then they produce, and then the revenue they receive is used to pay resource suppliers and lenders.
D)   firms first save (which is lending) , then they produce, and then the revenue they receive is used to lend even more.
E)   real interest rates rise faster than nominal interest rates because production occurs before income is received by the firm.F) A) and D)
G) A) and C)

Question 9

The demand for loanable funds decreases while the supply simultaneously increases. This would cause:

Accepted Answer

A)   the equilibrium quantity of loanable funds to decrease and the equilibrium interest rate to increase.
B)   the equilibrium quantity of loanable funds to increase and the equilibrium interest rate to decrease.
C)   the equilibrium quantity of loanable funds to increase, but the effect on the equilibrium interest rate would be uncertain.
D)   the equilibrium interest rate to increase, but the new equilibrium quantity would be uncertain.
E)   the equilibrium interest rate to decrease, but the new equilibrium quantity would be uncertain.F) A) and B)
G) A) and C)

Question 10

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

Accepted Answer

A)   cost; return
B)   return; cost
C)   rate of change; static value
D)   static value; rate of change
E)   nominal return; real returnF) B) and E)
G) B) and D)

Question 11

Every dollar borrowed:

Accepted Answer

A)   represents a dollar leaving the circular flow.
B)   requires a dollar to be saved.
C)   represents a piece of capital.
D)   requires the supply of loanable funds to increase.
E)   causes inflation.F) D) and E)
G) C) and E)

Question 12

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

Accepted Answer

A)   is most likely a saver.
B)   is most likely a borrower.
C)   is most likely a foreigner.
D)   is most concerned about nominal rather than real interest rates.
E)   is most likely just out of college.F) All of the above
G) B) and E)

Question 13

The real interest rate:

Accepted Answer

A)   equals the nominal rate minus the prime rate.
B)   increases as inflation increases, ceteris paribus.
C)   is what you really pay if you borrow versus what you think you are paying.
D)   equals the nominal rate plus the rate of inflation.
E)   equals the nominal rate minus the rate of inflation.F) All of the above
G) A) and D)

Question 14

Borrowers in the loanable funds market consist of:

Accepted Answer

A)   governments and firms.
B)   banks, foreign governments, and bonds.
C)   mutual fund firms, stock exchanges, and banks.
D)   households and foreign entities.
E)   arbitrage companies, banks, and firms.F) A) and B)
G) A) and E)

Question 15

If foreign entities save less and governments run more deficits, we would correctly say that:

Accepted Answer

A)   the new equilibrium quantity of loanable funds would decrease, but we would be unable to tell if the new equilibrium interest rate would be higher or lower than the original.
B)   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.
C)   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.
D)   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.
E)   based on this information and because both changes would affect the demand for loanable funds in the opposite way, we would be unable to say anything about the relationship of the new equilibrium interest rate and quantity to the original interest rate and quantity.F) A) and D)
G) A) and C)

Question 16

Assume households become thriftier. This would cause:

Accepted Answer

A)   the demand for loanable funds to increase.
B)   the supply of loanable funds to increase.
C)   both the demand and supply of loanable funds to increase.
D)   both the demand and supply of loanable funds to decrease.
E)   the supply of loanable funds to decrease.F) A) and B)
G) A) and C) B

Question 17

The concept of the loanable funds market is:

Accepted Answer

A)   similar to that of the grocery store-goods are sold and money is borrowed to pay for them.
B)   the market by which lenders (savers)  and borrowers exchange funds for earlier availability at a premium, which is represented by the interest rate.
C)   similar to the notion of consumer and producer surplus where the interest rate represents either consumer or producer surplus depending on who is doing the borrowing.
D)   the market by which borrowers (suppliers)  and lenders (demanders)  exchange funds for earlier availability at a premium, which is represented by the interest rate.
E)   that the interest rate is determined by multiplying the risk premium by the coefficient of pure interest.F) A) and B)
G) D) and E)

Question 18

Higher education:

Accepted Answer

A)   will generally result in higher lifetime earnings, ceteris paribus (all else equal) .
B)   is not generally worth the costs.
C)   will generally result in lower lifetime earnings, ceteris paribus (all else equal) .
D)   is worth the additional expense for bachelor's degrees and associate's degrees but not for master's degrees and higher.
E)   is only worth the additional expense for professional degrees such as law and medical degrees.F) D) and E)
G) C) and D) A

Question 19

It is likely that as more baby boomers reach retirement:

Accepted Answer

A)   more babies will be born to replace them.
B)   the demand for loanable funds will shift right.
C)   the demand for loanable funds will shift left.
D)   the supply of loanable funds will shift right.
E)   the supply of loanable funds will shift left.F) A) and D)
G) C) and E)

Question 20

If time preferences increase:

Accepted Answer

A)   the demand for loanable funds will increase.
B)   the demand for loanable funds will decrease.
C)   the supply of loanable funds will increase.
D)   the supply of loanable funds will decrease.
E)   wealth will increase.F) A) and B)
G) A) and C)

Exam 9: Savings, Interest Rates, and the Market for Loanable Funds

Every ____________ requires a ____________.

Correct AnswerverifiedShow Answer

The interest rate represents:

Correct AnswerverifiedShow Answer

As income and wealth rise, we would expect:

Correct AnswerverifiedShow Answer

The real interest rate in 2012 was:

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedD

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The timeline of production would indicate:

Correct AnswerverifiedShow Answer

The demand for loanable funds decreases while the supply simultaneously increases. This would cause:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Every dollar borrowed:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The real interest rate:

Correct AnswerverifiedShow Answer

Borrowers in the loanable funds market consist of:

Correct AnswerverifiedShow Answer

If foreign entities save less and governments run more deficits, we would correctly say that:

Correct AnswerverifiedShow Answer

Assume households become thriftier. This would cause:

Correct AnswerverifiedB

The concept of the loanable funds market is:

Correct AnswerverifiedShow Answer

Higher education:

Correct AnswerverifiedA

It is likely that as more baby boomers reach retirement:

Correct AnswerverifiedShow Answer

If time preferences increase:

Correct AnswerverifiedShow Answer

Every requires a .

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D

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

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B

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A

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