Question 1

The graph above shows the market for loanable funds. Suppose the supply curve shifts from $$S_1 to$$ $$S_2. $$Which of the following policy changes is most likely to cause this shift?

Accepted Answer

A shift from an income tax to a consumption tax

Question 2

Based on the graph, what happens to the equilibrium real interest rate and the equilibrium quantity of loanable funds when the supply curve shifts from $$S_1 to$$ $$S_2$$?

Accepted Answer

The real interest rate falls and the quantity of loanable funds rises.

Question 3

If the supply of loanable funds increases as shown in the graph, what is the likely effect on investment and long-run economic growth?

Accepted Answer

Investment increases and long-run economic growth accelerates.

Question 4

Which of the following best explains why the supply curve for loanable funds would shift to the right from $$S_1 to$$ $$S_2$$?

Accepted Answer

Households decide to save a larger portion of their income due to higher expected returns.

Question 5

Suppose the equilibrium moves from $$(i_1$, L_1$) to$$ $$(i_2$, L_2$) as $$shown in the graph. Which of the following statements is correct?

Accepted Answer

The equilibrium real interest rate decreases and the equilibrium quantity of loanable funds increases.

Question 6

If the government runs a budget surplus, what is the expected effect on the supply curve for loanable funds in the graph?

Accepted Answer

The supply curve shifts to the right, increasing loanable funds.

Question 7

Which equation represents the equilibrium condition in the market for loanable funds as depicted in the graph?

Accepted Answer

$$S = Y - C - G$$

Question 8

If the supply of loanable funds increases due to a policy change, which of the following is a likely long-term macroeconomic outcome?

Accepted Answer

An increase in labor productivity and potential GDP

Question 9

Which of the following would NOT cause the supply curve for loanable funds to shift from $$S_1 to$$ $$S_2 as $$shown in the graph?

Accepted Answer

A decrease in household saving rates

Question 10

If the equilibrium real interest rate falls as shown in the graph, what is the most likely effect on firms' investment decisions?

Accepted Answer

Firms will increase investment because borrowing is less expensive.

Economic Growth, the Financial System, and Business Cycles: Study Notes

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