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Exam 2: Determination of Interest Rates

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Question 21

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According to the Fisher effect, expectations of higher inflation cause savers to require a ____ on savings.

A) higher nominal interest rate
B) higher real interest rate
C) lower nominal interest rate
D) lower real interest rate

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Question 22

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According to the Fisher effect, if the real interest rate is zero, the nominal interest rate must be equal to the expected inflation rate.

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Question 23

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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 expectationsare not affected) .

The real interest rate can be forecasted by subtracting the ___ from the ____ for that period.

The federal government's demand for funds is ________, and municipal governments' demand for funds is somewhat ____________.

If the aggregate demand for loanable funds increases without a corresponding increase in aggregate supply, there will be a surplus of loanable funds.

Since the aggregate demand for loanable funds is the sum of the quantities demanded by the separate sectors, and since most of these sectors are likely to demand a larger quantity of funds atlower interest rates (other things being equal), the aggregate demand for loanable funds is positively related to interest rates at any point in time.

When forecasting future interest rates, if the net demand for funds (ND) is _____, there will be an ______ adjustment in interest rates.

If inflation turns out to be lower than expected

The substantial decline in interest rates during the credit crisis is attributed to which of the following changes in the market for loanable funds?

According to the Fisher effect, when the inflation rate is lower than anticipated, the real interest rate is relatively low.

What is the basis of the relationship between the Fisher effect and the loanable funds theory?

If economic conditions become less favorable, then:

A ____ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an ____ shift in the demand schedule.

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 ratesare lower.

Other things being equal, a ____ quantity of U.S. funds would be demanded by foreign governments and corporations if their domestic interest rates were ____ relative to U.S. rates.

Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. securities. This should cause the supply of loanable funds in the United States to____ and should place ____ pressure on U.S. interest rates.

Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. securities and to instead increase their holdings of securities in their own countries. This should cause the supply of loanable funds in the United States to______ and should place ____ pressure on U.S. interest rates.

If investors shift funds from stocks into bank deposits, this ____ the supply of loanable funds and places ____ pressure on interest rates.

The supply of loanable funds in the United States is partly determined by the monetary policy implemented by the Federal Reserve System.