Interest rates are important in explaining economic activity. A. Using a correctly labeled graph of the money market, show how an increase in the income level will affect the nominal interest rate in the short run. B. Using a correctly labeled graph of the loanable funds market, show how a decision by households to increase saving for retirement will affect the real interest rate in the short run.
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- Use the graph to answer the question that follows. Real interest rate % r Dif q q' Quantity of loanable funds $ The graph shows a change in an economy after the government's decision to provide tax benefits to businesses in an effort to increase investment. What is the new point of equilibrium in the economy's loanable funds market? O o Or O o O q Or o' Sif D'IfComplete the following statements. a. Dan saves a portion of his income in an interest-earning account. In the loanable funds market, Dan is b. John owns a pizzeria and needs to borrow money for a new oven. In the loanable funds market, John is c. Savers like Dan are likely to save more when the real interest rate . Therefore, the supply of loanable funds Look at images for word bank . d. Borrowers like John are likely to borrow more when the real interest rate . Therefore, the demand for loanable funds .What is true about equilibrium in the market for loanable funds? A. Savings = gross domestic product (GDP) B. Investment = interest rate C. Interest rate = inflation D. Investment = savings
- Consider the market for loanable fund. Answer the question below. 2.a. The market equilibrium interest rate is 3%. But current interest rate is 4%. Then, is the supply of loanable fund larger, smaller or equal to the demand for loanable fund? 2.b. People’s preference for saving increased. Answer if the equilibrium interest rate and investment would increase, decrease, or would not change. Interest rate: Investment:Some studies have found that saving is not very sensitive to the rate of return on saving. a.true b.false↑ Match each of the following scenarios with the appropriate graph of the market for loanable funds. NEAL Loanable funds Loanable funds 292 D₁ D₂ Loanable funds Loanable funds a. An increase in the real interest rate results in only a small increase in private saving by households. This matches graph b. A decrease in the real interest rate results in a substantial increase in spending on investment projects by businesses. This matches graph c. The federal government eliminates RRSPs and TFSAS (tax-deductible retirement accounts). This matches graph d. The federal government reduces the tax on corporate profits. (Assume no change in the federal budget deficit or budget surplus.) This matches graph
- Consider a loanable funds market of Pakistan. Suppose, if government want to implement the policy to provide incentives on savings by allowing people to shield their savings by opening Retirement Accounts with commercial banks. What is the effect of this policy on the market for loanable finds a. Interest rate will (Please write one word either increase or decrease in the blank). b. Quantity of loanable funds will (Please write one word either increase or decrease in the blank) Now assume, the parliament passed a tax reform aimed at making investment more attractive-for instance, by instituting an investment tax credit. An investment tax credit gives a tax advantage to any firm building a new factory or buying a new piece of equipment What is the effect of this policy on the market for loanable finds c. Interest rate will (Please write one word either increase or decrease in the blank). d. Quantity of loanable funds will (Please write one word either increase or decrease in the blank)The following figure plots real interest rate against quantity of credit. Real interest rate (%) S, A B. S, D, D, Quantity of credit ($) Refer to the figure above. Assume that the loanable funds market initially is in equilibrium at point D. What has to be true for the new equilibrium to be at point A? O The inflation rate must increase. Companies' or individuals' savings must decrease. O Companies' or individuals' investments must decrease. O The demand of credit must not shift.The financial markets play an important role in channeling funds from savers to borrowers. Which of the following illustartes this function of financial market? A) Investors purchase assets like real estate and gold from other investors B) Investors purchase securities that are issued by firms and government C) Investors deposit funds into interest bearing accounts which are then loaned to borrowers D) Investors purchase capital goods which are used in production by borrowers
- K Consider the graph to answer the following questions: a. The shift from S, to S₂ represents in the supply of loanable funds. b. With the shift in supply, the equilibrium quantity of loanable funds c. With the change in the equilibrium quantity of loanable funds, the quantity of saving and the quantity of investment ▼ A CI Real Interest Rate Market for Loanable Funds L₂ L1 Loanable Funds ($ per year) S₁ QQuestion:As interest rate decreases, what happens to the quantity of loanable funds demanded? a. Some borrowers will demand more funds whereas others will demand less. b. There will be no change in the quantity demanded. c. Quantity demanded will increase. d. Quantity demanded will decrease. QUESTION What effect will an increase in interest rates have on the quantity of loanable funds supplied? • a. There will be no change in quantity supplied. • b. Some lenders will offer more whereas others will offer less. • c. Quantity supplied will decrease. • d. Quantity supplied will increase.Draw a graph to illustrate the effect of a decrease in the demand for loanable funds and a smaller decrease in the supply of loanable funds on the real interest rate and the equilibrium quantity of loanable funds. Draw a demand for loanable funds curve. Label it DLF Draw a supply of loanable funds curve. Label it SLF Draw a point at the equilibrium real interest rate and quantity of loanable funds. Label it 1. Draw a curve that shows a decrease in the demand for loanable funds. Label it DLF₁. Draw a curve that shows a smaller decrease in the supply of loanable funds. Label it SLF₁. Draw a point at the new equilibrium real interest rate and quantity of loanable funds. Label it 2. KKKTES 12.0 10.0 8.0 6.0 4.0 20 Real interest rate (percent per year) 0.0+ 0.0 5.0 Q Q 2 1.0 2.0 3.0 4.0 Loanable funds (trillions of 2012 dollars) >>> Draw only the objects specified in the question.