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# ECON 201 ANSWERS

Test Bank: II Topic: Loanable Funds Theory of Interest Rates

Which of the following will increase the supply of loanable funds? An increase in the

rates of return on potential investments.

productivity of business firms.

demand for business products.

D. savings of households.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-03 Explain the loanable funds theory of interest rates.

Test Bank: II Topic: Loanable Funds Theory of Interest Rates

Which factor will increase the demand for loanable funds?

a change in the tax law to exempt savings from taxation

expansion of social insurance to cover more fully the cost of retirement

a general business recession that produces high rates of unemployment

D. a technological advance that increases returns on investments

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-03 Explain the loanable funds theory of interest rates.

Test Bank: II Topic: Loanable Funds Theory of Interest Rates

A decrease in the supply of loanable funds and an increase in the demand for loanable funds will

increase the interest rate and the quantity of funds loaned.

decrease the interest rate and the quantity of funds loaned.

C. increase the interest rate, but the quantity of funds loaned may either increase or decrease.

D. decrease the interest rate, but the quantity of funds loaned may either increase or decrease.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-03 Explain the loanable funds theory of interest rates.

Test Bank: II Topic: Loanable Funds Theory of Interest Rates

There will be pressure on the interest rate for loanable funds to increase when

supply increases.

demand decreases.

quantity supplied exceeds quantity demanded.

D. quantity demanded exceeds the quantity supplied.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-03 Explain the loanable funds theory of interest rates.

Test Bank: II Topic: Loanable Funds Theory of Interest Rates

An increase in the demand for loanable funds may be caused by a(n)

increase in the availability of loanable funds.

increase in consumers' willingness to save.

C. increase in business borrowing.

D. decrease in the interest rate.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-03 Explain the loanable funds theory of interest rates.

Test Bank: II Topic: Loanable Funds Theory of Interest Rates

If an economic expansion in the economy caused an increase in the demand for loanable funds, what would be the effect on the interest rate and the quantity of funds loaned in the credit market?

Interest rates would increase and the quantity of funds loaned would decrease.

Interest rates would decrease and the quantity of funds loaned would increase.

Interest rates and the quantity of funds loaned would decrease.

D. Interest rates and the quantity of funds loaned would increase.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-03 Explain the loanable funds theory of interest rates.

Test Bank: II Topic: Loanable Funds Theory of Interest Rates

Which of the following would cause an increase in interest rates in credit markets?

a decrease in business demand for credit

an increase in the supply of consumer saving

an increase in the supply of business saving

D. an increase in consumer demand for credit

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-03 Explain the loanable funds theory of interest rates.

Test Bank: II Topic: Loanable Funds Theory of Interest Rates

Suppose many businesses want to increase their stock of capital goods and decide to borrow funds to do it. Which would be the likely result of this event?

A. Interest rates would increase.

Interest rates would decrease.

The equilibrium quantity of loanable funds would decrease.

The equilibrium quantity of loanable funds would remain unchanged.

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Blooms: Remember Difficulty: 01 Easy

Learning Objective: 18-02 Define interest and explain how interest rates vary based on risk, maturity, loan size, and taxability.

Test Bank: II Topic: Loanable Funds Theory of Interest Rates

Which of the following statements about interest rates is false?

Interest rates typically reflect the risk involved in extending a loan.

Interest rates are affected by households' spending decisions.

The equilibrium interest rate is determined by the intersection of the supply and demand schedules for loanable funds.

D. The supply of loanable funds is independent of the rate of interest.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-03 Explain the loanable funds theory of interest rates.

Test Bank: II Topic: Loanable Funds Theory of Interest Rates

A decrease in saving that leads to an increase in the interest rate will

A. decrease the amount of investment spending.

only result in a surplus of loanable funds.

shift the demand for loanable funds to the right, increasing net investment.

shift the demand for loanable funds to the left, causing a decrease in investment.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-03 Explain the loanable funds theory of interest rates.

Test Bank: II Topic: Loanable Funds Theory of Interest Rates

As interest rates decrease, the

A. cost of current relative to future consumption increases.

B. cost of current relative to future consumption decreases.

cost of current consumption relative to future consumption remains the same.

desire of many individuals to save increases.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-03 Explain the loanable funds theory of interest rates.

Test Bank: II Topic: Loanable Funds Theory of Interest Rates

The core concept that is central to understanding the time-value of money is

GDP growth.

inflation.

C. interest rate.

D. exchange rate.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.

Test Bank: II Topic: Time-Value of Money

Which expression is used to calculate the future value of an amount of money?

A. Present Value Ã— (1 + interest rate)time

Present Value/(1 + interest rate)time

Present Value Ã— (1 + time)interest rate

(1 + interest rate)time/Present Value

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.

Test Bank: II Topic: Time-Value of Money

Which expression is used to calculate the present value of an amount of money?

A. Future Value Ã— (1 + interest rate)time

B. Future Value/(1 + interest rate)time

Future Value Ã— (1 + time)interest rate

(1 + interest rate)time/Future Value

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.

Test Bank: II Topic: Time-Value of Money

If the interest rate is 15 percent, what is the future of value of $10,000 two years from now?

A. $13,225 B. $225

C. $13,000 D. $7,576

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.

Test Bank: II Topic: Time-Value of Money

If the interest rate is 5 percent, what is the future value of $5,000 three years from now? A. $4,310

B. $5,500

C. $5,010

D. $5,788

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.

Test Bank: II Topic: Time-Value of Money

If the interest rate is 10 percent, what is the present value of $25,000 received two years from now? A. $20,000

B. $20,661

C. $30,250 D. $30,000

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.

Test Bank: II Topic: Time-Value of Money

If the interest rate is 5 percent, what is the present value of $10,000 received three years from now?

A. $8,638 B. $9,000 C. $11,600 D. $11,000

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.

Test Bank: II Topic: Time-Value of Money

A given future value of money would have a smaller present value if

A. the interest rate used in discounting is higher.

the length of time over which it is "discounted" is shorter.

the interest rate is zero.

there is no compounding of interest.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.

Test Bank: II Topic: Time-Value of Money

197.

The table applies to a loan with an interest rate of 5 percent per period. What value goes in the cell labeled W?

A. $205 B. $105 C. $210 D. $2,205

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.

Test Bank: II Topic: Time-Value of Money

198.

The table applies to a loan with an interest rate of 5 percent per period. What value goes in the cell labeled X?

A. $2,200

B. $2,315.25 C. $2,210

D. $2,205

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.

Test Bank: II Topic: Time-Value of Money

199.

The table applies to a loan with an interest rate of 5 percent per period. What value goes in the cell labeled Z?

A. $2,200

B. $2,315.25 C. $2,210

D. $2,205

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-04 Demonstrate how interest rates relate to the time-value of money.

Test Bank: II Topic: Time-Value of Money

Government monetary authorities manipulate the supply of money in the economy primarily to

ensure high profits for commercial banks.

provide sufficient currency to individuals and businesses to conduct their daily business.

keep the dollar strong measured against the currencies of foreign nations.

D. influence the interest rate and the levels of investment, output, and prices in the economy.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping to determine the economys total output of goods and services.

Test Bank: II Topic: Role of Interest Rates

Profit-maximizing businesses will buy more new machinery only if

the interest rate increases.

labor costs are low and expected to fall.

C. the expected rate of return of the new machinery is greater than the interest rate.

D. the present value of the new machinery is lower than its purchase price.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping to determine the economys total output of goods and services.

Test Bank: II Topic: Role of Interest Rates

Suppose a firm is considering the purchase of a machine which would increase its total revenues by $10,000 for the year. The machine costs $8,000 and has a useful life of one year. The interest rate is 20 percent. This investment should

A. be undertaken because the rate of return is 2 percent greater than the interest rate.

B. be undertaken because the rate of return is 5 percent greater than the interest rate.

be undertaken because the rate of return is 7 percent greater than the interest rate.

not be undertaken, because the rate of return is 7 percent less than the interest rate.

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Blooms: Understand Difficulty: 02 Medium

Learning Objective: 18-05 Explain the role of interest rates in allocating capital, modulating R and D spending, and helping to determine the economys total output of goods and services.

Test Bank: II Topic: Role of Interest Rates

203.

The table gives investment-demand in an economy. If the interest rate is 15 percent,

A. $400 billion of investment will be undertaken.

B. $460 billion of investment will be undertaken.

$530 billion of investment will be undertaken.

$600 billion of investment will be undertaken.

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Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

204.

The table gives investment-demand in an economy. An increase in the interest rate from 15 percent to 19 percent would

increase investment by $90 billion.

decrease investment by $90 billion.

C. decrease investment by $110 billion.

D. decrease investment by $140 billion.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

205.

The table gives investment-demand in an economy. Assume that investment demand decreased by $100 billion in the investment-demand schedule. What expected rate of return and interest rate would create $430 billion of investment?

A. 13 percent

15 percent

17 percent

19 percent

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Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

It is most likely that a firm would borrow funds to expand its capital facilities when the

A. pure rate of interest is greater than the real rate of interest.

B. expected rate of return is greater than the interest rate.

demand for money is greater than the supply of money.

real rate of interest is greater than the nominal rate of interest.

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Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

If the desired real rate of interest is 5 percent and the expected rate of inflation is 15 percent, what is the nominal rate of interest?

5 percent

10 percent

15 percent

D. 20 percent

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Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

If the inflation rate is 10 percent, what is a bank's real rate of return on a loan of $100 at 10 percent interest?

A. $100 B. $10

C. 10 percent

D. 0 percent

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Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

If you pay $1,980 annually on an $18,000 loan and the rate of inflation is 3 percent, then the

A. real rate of interest is 8 percent

nominal rate of interest is 8 percent.

real rate of interest is 11 percent.

nominal rate of interest is 14 percent.

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Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

If you pay $10,625 annually on a $125,000 loan and the rate of inflation is 3 percent, then the

A. real rate of interest is 4.5 percent.

B. nominal rate of interest is 8.5 percent.

real rate of interest is 6.5 percent.

nominal rate of interest is 11.5 percent.

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Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

Some countries have negative nominal interest rates. Which of the following statements about this situation is not true?

A saver or lender will get back less than the amount she invested.

This is mostly a result of deliberate central bank policies.

C. Consumers are expected to save more and consume less.

D. Consumers are expected to borrow more and spend more.

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Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

A usury law is a law that sets the

A. federal funds rate.

B. maximum interest rate at which loans can be made.

spread between the prime rate of interest and credit card rates.

interest paid on 90-day Treasury bills and 30-year bonds of the U.S. government.

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Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

For a usury law to be effective, the interest rate must be

determined by borrowing and lending.

set at the market equilibrium interest rate.

set above the market equilibrium interest rate.

D. set below the market equilibrium interest rate.

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Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

One effect of a usury law is that it will

benefit lenders.

penalize borrowers.

increase the efficiency of investment.

D. subsidize borrowers with high incomes.

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Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

215.

Answer the question using the table. Figures are in billions of dollars. The equilibrium interest rate and quantity of loanable funds demanded and supplied in this market will be

8 percent and $140 billion.

10 percent and $140 billion.

C. 12 percent and $180 billion.

D. 14 percent and $240 billion.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

216.

Answer the question using the table. Figures are in billions of dollars. If the government passes a usury law that sets the interest rate 4 percent below the market equilibrium, the interest rate will be

A. 6 percent.

B. 8 percent.

10 percent.

12 percent.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

217.

Answer the question using the table. Figures are in billions of dollars. A usury law that sets the interest rate 2 percent below the market rate of interest will result in a shortage of funds of

A. $120 billion.

B. $80 billion.

$40 billion.

$20 billion.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

218.

Refer to the graph of the supply and demand for loanable funds. Assume that the government sets a 10 percent limit on the interest rate that banks can charge to customers for credit card loans. In this case, the quantity of loanable funds

A. demanded will exceed the quantity supplied by $150 billion.

B. demanded will exceed the quantity supplied by $100 billion.

demanded will exceed the quantity supplied by $50 billion.

supplied will exceed the quantity demanded by $50 billion.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

219.

Refer to the graph of the supply and demand for loanable funds. A limit of 10 percent on the interest rate that banks can charge for loans will

A. have an equal effect on borrowers and lenders.

B. save borrowers 5 percent and cost lenders 5 percent on the amount loaned.

give lenders a premium of 5 percent and cost borrowers 5 percent on the amount loaned.

save borrowers 10 percent and cost lenders 10 percent on the amount loaned.

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Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

220.

Answer the question using the table. Figures are in billions of dollars. The equilibrium interest rate and quantity of loanable funds demanded and supplied in this market will be

8 percent and $14 billion.

10 percent and $18 billion.

C. 12 percent and $22 billion.

D. 14 percent and $26 billion.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

221.

Answer the question using the table. Figures are in billions of dollars. If the government passes a usury law that sets the interest rate 2 percent below the market equilibrium, the interest rate will be

6 percent.

8 percent.

C. 10 percent.

D. 12 percent.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

222.

Answer the question using the table. Figures are in billions of dollars. A usury law that sets the interest rate 4 percent below the market rate of interest will result in a shortage of loanable funds of

$10 billion.

$14 billion.

C. $20 billion.

D. $30 billion.

AACSB: Knowledge Application

Blooms: Understand Difficulty: 02 Medium

Test Bank: II Topic: Role of Interest Rates

Economists claim that a farmer who owns her land, provides all her own labor, and calculates her profits from the farm by subtracting explicit costs from total revenues will

overstate her accounting profits.

understate her accounting profits.

C. overstate her economic profits.

D. understate her economic profits.