AP_Krugman_Textbook

Section 5 The Financial Sector
Tackle the Test: Multiple-Choice Questions

1. A business will decide whether or not to borrow money to
   finance a project based on a comparison of the interest rate
   with the from its project.
   a. expected revenue
   b. profit
   c. rate of return
   d. cost generated
   e. demand generated


2. The real interest rate equals the
   a. nominal interest rate plus the inflation rate.
   b. nominal interest rate minus the inflation rate.
   c. nominal interest rate divided by the inflation rate.
   d. nominal interest rate times the inflation rate.
   e. federal funds rate.


3. Which of the following will increase the demand for
   loanable funds?
   a. a federal government budget surplus
   b. an increase in perceived business opportunities

c. a decrease in the interest rate

d. positive capital inflows

e. decreased private saving rates

4. Which of the following will increase the supply of
   loanable funds?
   a. an increase in perceived business opportunities
   b. decreased government borrowing
   c. an increased private saving rate
   d. an increase in the expected inflation rate
   e. a decrease in capital inflows


5. Both lenders and borrowers base their decisions on
   a. expected real interest rates.
   b. expected nominal interest rates.
   c. real interest rates.
   d. nominal interest rates.
   e. Nominal interest rates minus real interest rates.

Tackle the Test: Free-Response Questions

1. Draw a correctly labeled graph showing equilibrium in the
   loanable funds market.

Answer (6 points)

1 point:Vertical axis labeled “Interest rate” or “r”

1 point:Horizontal axis labeled “Quantity of loanable funds”

1 point:Downward sloping demand curve for loanable funds (labeled)

1 point:Upward sloping supply curve for loanable funds (labeled)

1 point:Equilibrium quantity of loanable funds shown on horizontal axis below
where curves intersect

1 point:Equilibrium interest rate shown on vertical axis across from where
curves intersect

Quantity of loanable funds

Interest
rate, r

D

S

E

QE

rE

2. Does each of the following affect either the supply or the
   demand for loanable funds, and if so, does the affected curve
   increase (shift to the right) or decrease (shift to the left)?
   a. There is an increase in capital inflows into the economy.
   b. Businesses are pessimistic about future business conditions.
   c. The government increases borrowing.
   d. The private savings rate decreases.

module 29 The Market for Loanable Funds 287