270 Chapter 2 Determination of Interest Rates Chapter 2 Determination of Interest Rates 1 The level of installment debt as a percentage of disposable income has been in recent years it is generally in recessionary periods A increasing higher B increasing lower C decreasing higher D decreasing lower ANSWER B 2 At any given point in time households would demand a quantity of loanable funds at rates of interest A greater higher B greater lower C smaller lower D none of these ANSWER B 3 Businesses demand loanable funds to A finance installment debt B subsidize other companies C invest in fixed and short term assets D do none of these ANSWER C 4 The required return to implement a given business project will be if interest rates are lower This implies that businesses will demand a quantity of loanable funds when interest rates are lower A greater lower B lower greater C lower lower D greater greater ANSWER B 5 If interest rates are projects will have positive NPVs A higher more B lower more C lower no D none of these ANSWER B 271 Chapter 2 Determination of Interest Rates 6 The demand for funds resulting from business investment in short term assets is related to the number of projects implemented and is therefore related to the interest rate A inversely positively B positively inversely C inversely inversely D positively positively ANSWER B 7 If economic conditions become less favorable A expected cash flows on various projects will increase B more proposed projects will have expected returns greater than the hurdle rate C there would be additional acceptable business projects D there would be a decreased demand by business for loanable funds ANSWER D 8 As a result of more favorable economic conditions there is a n demand for loanable funds causing an shift in the demand curve A decreased inward B decreased outward C increased outward D increased inward ANSWER C 9 The federal government demand for loanable funds is interest If the budget deficit was expected to increase the federal government demand for loanable funds would A elastic decrease B elastic increase C inelastic increase D inelastic decrease ANSWER C 10 Other things being equal foreign governments and corporations would demand U S funds if their local interest rates were lower than U S rates Therefore for a given set of foreign interest rates foreign demand for U S funds is related to U S interest rates A less inversely B more positively C less positively D more inversely ANSWER A Chapter 2 Determination of Interest Rates 272 11 For a given set of foreign interest rates the quantity of U S loanable funds demanded by foreign governments or firms will be U S interest rates A positively related to B inversely related to C unrelated to D none of these ANSWER B 12 The quantity of loanable funds supplied is normally A highly interest elastic B more interest elastic than the demand for loanable funds C less interest elastic than the demand for loanable funds D equally interest elastic as the demand for loanable funds ANSWER C 13 The sector is the largest supplier of loanable funds A household B government C business D none of these ANSWER A 14 If a strong economy allows for a large in households income the supply curve will shift A decrease outward B increase inward C increase outward D none of these ANSWER C 15 The equilibrium interest rate A equates the aggregate demand for funds with the aggregate supply of loanable funds B equates the elasticity of the aggregate demand and supply for loanable funds C decreases as the aggregate supply of loanable funds decreases D increases as the aggregate demand for loanable funds decreases ANSWER A 16 The equilibrium interest rate should A fall when the aggregate supply funds exceeds aggregate demand for funds B rise when the aggregate supply of funds exceeds aggregate demand for funds C fall when the aggregate demand for funds exceeds aggregate supply of funds D rise when aggregate demand for funds equals aggregate supply of funds ANSWER A 273 Chapter 2 Determination of Interest Rates 17 Which of the following are likely to cause a decrease in the equilibrium U S interest rate other things being equal A a decrease in savings by foreign savers B an increase in inflation C pessimistic economic projections that cause businesses to reduce expansion plans D a decrease in savings by U S households ANSWER C 18 The Fisher effect states that the A nominal interest rate equals the expected inflation rate plus the real rate of interest B nominal interest rate equals the real rate of interest minus the expected inflation rate C real rate of interest equals the nominal interest rate plus the expected inflation rate D expected inflation rate equals the nominal interest rate plus the real rate of interest ANSWER A 19 If the real interest rate was negative for a period of time then A inflation is expected to exceed the nominal interest rate in the future B inflation is expected to be less than the nominal interest rate in the future C actual inflation was less than the nominal interest rate D actual inflation was greater than the nominal interest rate ANSWER D 20 If inflation is expected to decrease then A savers will provide less funds at the existing equilibrium interest rate B the equilibrium interest rate will increase C the equilibrium interest rate will decrease D borrowers will demand more funds at the existing equilibrium interest rate ANSWER C 21 If inflation turns out to be lower than expected A savers benefit B borrowers benefit while savers are not affected C savers and borrowers are equally affected D savers are adversely affected but borrowers benefit ANSWER A 22 If the economy weakens there is pressure on interest rates If the Federal Reserve increases the money supply there is pressure on interest rates assume that inflationary expectations are not affected A upward upward B upward downward C downward upward D downward downward ANSWER D 23 What is the basis of the relationship between the Fisher effect and the loanable funds theory A the saver s desire to maintain the existing real rate of interest B the borrower s desire to achieve a positive real rate of interest Chapter 2 Determination of Interest Rates 274 C the saver s desire to achieve a negative real rate of interest D none of these ANSWER A 24 Assume that foreign investors who have invested in U S securities decide to decrease their holdings of U S securities and instead increase their holdings of securities in their own countries