AP Macroeconomics - Unit 4 Loanable Funds: Teacher MCQ

If businesses become optimistic about the profitability of investments in an economy, which of the following will happen in the loanable funds market in the short run?

(A)The supply and demand for loanable funds will increase.

(B)The supply and demand for loanable funds will decrease.

(C)The demand for loanable funds by the private sector will decrease.

(D)The real interest rate will increase.

(E)The real interest rate will decrease.

Answer D

If investors feel that business conditions will deteriorate in the future, the demand for loans and real interest rate in the loanable funds market will change in which of the following ways in the short run?

(A)Demand for Loans /Real Interest Rate

Increase /Increase

(B)Demand for Loans /Real Interest Rate

Increase /Decrease

(C)Demand for Loans /Real Interest Rate

Decrease /Increase

(D)Demand for Loans /Real Interest Rate

Decrease /Decrease

(E)Demand for Loans /Real Interest Rate

Decrease /Not change

Answer D

An increase in the demand for loanable funds could be best explained by which of the following?

(A)There is a decrease in investment spending.

(B)There is an increase in the government's budget surplus.

(C)Firms are optimistic about the future performance of the country's economy.

(D)Domestic investors seek higher returns by investing in foreign financial assets.

(E)The economy is facing political instability.

Answer C

All of the following changes will shift the investment demand curve to the right EXCEPT

(A)a decrease in the corporate income tax rate

(B)an increase in the productivity of new capital goods

(C)an increase in the real interest rate

(D)an increase in corporate profits

(E)an increase in real gross domestic product

Answer C

In the short run, government deficit spending will most likely

(A)raise the unemployment rate

(B)lower the inflation rate

(C)raise nominal interest rates

(D)lower private savings

(E)raise net exports

Answer C

An expansionary fiscal policy financed by government borrowing will most likely lead to which of the following changes in the real interest rate and the value of the country's currency?

(A)The real interest rate will increase, and the currency will appreciate.

(B)The real interest rate will increase, and the currency will not change.

(C)The real interest rate will not change, and the currency will not change.

(D)The real interest rate will decrease, and the currency will depreciate.

(E)The real interest rate will decrease, and the currency will appreciate.

Answer A

Which of the following changes would most likely cause an increase in interest rates in the short run?

(A)A decrease in reserve requirements

(B)An increase in trade deficits

(C)An open market purchase of government bonds by the Federal Reserve

(D)An increase in government spending financed by borrowing

(E)An increase in the price of bonds

Answer D

Assume that the government finances its spending by borrowing from the public. If the government increases deficit spending, the price of previously issued bonds and the real interest rate will change in which of the following ways?

(A)Price of Bonds /Real Interest Rate

Decrease /Decrease

(B)Price of Bonds /Real Interest Rate

Decrease /Increase

(C)Price of Bonds /Real Interest Rate

Increase /Decrease

(D)Price of Bonds /Real Interest Rate

Increase /No change

(E)Price of Bonds /Real Interest Rate

Increase /Increase

Answer B

Which of the following is most likely to increase the real interest rate in Country Z?

(A)Country Z's central bank purchases government securities from banks and citizens.

(B)Country Z reduces government expenditures.

(C)Country Z is viewed as having increased political and economic risk.

(D)Country Z's citizens increase their savings in anticipation of needed retirement income.

(E)Country Z introduces a tax on consumption goods.

Answer C

When there is excess demand in the loanable funds market, which of the following will occur?

(A)National savings will exceed investment spending.

(B)The economy will remain at full employment.

(C)Real interest rates will increase.

(D)An inflationary gap will exist.

(E)The money supply will increase.

Answer C

If the federal government reduces its budget deficit when the economy is close to full employment, which of the following will most likely result?

(A)Inflation will increase.

(B)Tax revenues will increase.

(C)Interest rates will decrease.

(D)Unemployment will decrease.

(E)The international value of the dollar will increase.

Answer C

Investment in physical capital is most likely to occur as a result of an increase in

(A)interest rates

(B)inflation rates

(C)business confidence

(D)money demand

(E)personal consumption

Answer C

The loanable funds market is best described as bringing together

(A)savers and borrowers

(B)investors and borrowers

(C)financial institutions and investors

(D)savers and lenders

(E)banks and savers

Answer A

If the loanable funds market is in equilibrium, then which of the following must be true?

(A)Government spending equals tax revenues.

(B)Investment spending equals national savings.

(C)Investment spending equals private savings.

(D)Borrowing equals lending.

(E)Foreign inflows of financial capital equal investment spending.

Answer D

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

(A)An increase in household saving

(B)An increase in open market sales by the central bank

(C)An increase in government spending

(D)An increase in transfer payments

(E)An increase in investment demand

Answer A

Which of the following will lower the prices of a country's outstanding government bonds?

(A)An open-market purchase of government bonds by the country's central bank

(B)A decrease in the required reserve ratio for the country's commercial banks

(C)An outflow of financial capital to other countries

(D)A decrease in the country's government spending

(E)A decrease in inflationary expectations in the country

Answer C

Which of the following changes in the loanable funds market will decrease the equilibrium real interest rate?

(A)A decrease in private savings

(B)A decrease in the expected inflation rate

(C)An increase in government spending on highways financed by borrowing

(D)An increase in foreign financial capital inflows

(E)An investment tax credit for plant and equipment

Answer D

Which of the following will cause an increase in the equilibrium real interest rate?

(A)An increase in investment demand

(B)An increase in national saving

(C)An increase in the government budget surplus

(D)A decrease in the government budget deficit

(E)The purchase of government bonds by the central bank

Answer A

An increase in investment demand for capital goods accompanied by an increase in household savings will result in which of the following in the market for loanable funds?

(A)The demand curve for loanable funds will shift to the right along an unchanged supply curve, increasing the quantity supplied of funds and the real interest rate.

(B)The demand and supply curves of loanable funds will shift to the right, causing a decrease in the real interest rate.

(C)The equilibrium real interest rate will increase, but the impact on the quantity of loanable funds is indeterminate.

(D)The equilibrium quantity of loanable funds will increase, but the impact on the real interest rate is indeterminate.

(E)There will be a surplus of funds in the market for loanable funds.

Answer D

An increase in government spending with no change in taxes leads to a

(A)lower income level

(B)lower price level

(C)smaller money supply

(D)higher interest rate

(E)higher bond price

Answer D

Which of the following will most likely result in a lower real interest rate in a nation?

(A)The nation provides an investment tax credit to new businesses.

(B)The citizens of the nation increase their savings for retirement.

(C)The nation is experiencing political instability and economic risk.

(D)The nation's central bank sells government bonds in the open market.

(E)The nation's government increases its borrowing to finance spending on capital projects.

Answer B