Question 1

Suppose a technological improvement increases expected profits for firms. According to the loanable funds market diagrams, what is the most likely effect on the equilibrium interest rate and quantity of loanable funds?

Accepted Answer

The demand for loanable funds shifts right, raising both the interest rate and quantity of loanable funds.

Question 2

If there is an increase in wealth among households, what happens to the supply curve of loanable funds (SLF) and the equilibrium interest rate, holding all else constant?

Accepted Answer

SLF shifts left; equilibrium interest rate falls.

Question 3

Which equation correctly represents the national income identity in an open economy, as shown in the notes?

Accepted Answer

$$Y = C + I + G + (X - M)$$

Question 4

A cut in the corporate income tax is most likely to have which effect in the loanable funds market?

Accepted Answer

Shift the demand for loanable funds right, raising the interest rate and quantity of funds.

Question 5

If the real interest rate increases, what happens to the quantity of loanable funds demanded, according to the diagrams?

Accepted Answer

It decreases because fewer investment projects are profitable.

Question 6

Which of the following best describes the difference between the nominal and real interest rate?

Accepted Answer

Nominal interest rate is the rate in terms of money; real interest rate is the rate in terms of goods.

Question 7

Given the equation $$I = S + (T - G) + (M - X)$$, what does $$(T - G)$$ represent?

Accepted Answer

Government budget surplus

Question 8

If default risk increases in the economy, what is the expected effect on the supply of loanable funds and the equilibrium interest rate?

Accepted Answer

Supply of loanable funds shifts left; interest rate rises.

Question 9

Which of the following would cause the demand for loanable funds (DLF) to shift to the right?

Accepted Answer

Increase in expected profits

Question 10

If productivity increases in the labor market, what happens to the potential GDP ($$y_p) $$and the demand for labor ($$L_d$$)?

Accepted Answer

$$y_p$$ rises and $$L_d$$ shifts right

Question 11

Suppose the government increases taxes ($$T) $$while keeping spending ($$G) $$constant. According to the national income identity, what is the effect on public saving?

Accepted Answer

Public saving increases

Question 12

Which of the following best explains why the supply of loanable funds might shift to the left?

Accepted Answer

Increase in household wealth

Question 13

If the government runs a budget deficit, which term in the equation $$I = S + (T - G) + (M - X)$$ becomes negative?

Accepted Answer

$$(T - G)$$

Question 14

A rightward shift in the demand for labor ($$L_d) is $$most likely caused by which of the following?

Accepted Answer

Increase in productivity

Question 15

If the supply of labor increases, what happens to the equilibrium real wage ($$w/p) $$and quantity of labor ($$L) in $$the labor market?

Accepted Answer

Real wage falls; quantity of labor rises.

Question 16

Which of the following would NOT shift the supply of loanable funds curve?

Accepted Answer

Change in expected profits

Question 17

If exports ($$X) $$exceed imports ($$M$$), what is the effect on the supply of loanable funds in the domestic market?

Accepted Answer

Supply of loanable funds increases due to net capital inflow.

Question 18

Which of the following is true about the relationship between the real interest rate and investment?

Accepted Answer

As the real interest rate falls, investment increases.

Question 19

If the government increases spending ($$G) $$without raising taxes ($$T$$), what is the likely effect on the supply of loanable funds?

Accepted Answer

Supply of loanable funds decreases due to a lower government budget surplus.

Question 20

Which of the following would cause the demand for labor ($$L_d) to $$shift right, according to the diagrams?

Accepted Answer

Increase in expected profits

Loanable Funds Market, Labor Market, and Macroeconomic Equilibrium

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