Page 329 - Krugmans Economics for AP Text Book_Neat

Tackle the Test: Multiple-Choice Questions
1. A business will decide whether or not to borrow money to c. a decrease in the interest rate
finance a project based on a comparison of the interest rate d. positive capital inflows
with the from its project. e. decreased private saving rates
a. expected revenue
4. Which of the following will increase the supply of Section 5 The Financial Sector
b. profit
loanable funds?
c. rate of return
a. an increase in perceived business opportunities
d. cost generated
b. decreased government borrowing
e. demand generated
c. an increased private saving rate
2. The real interest rate equals the d. an increase in the expected inflation rate
a. nominal interest rate plus the inflation rate. e. a decrease in capital inflows
b. nominal interest rate minus the inflation rate.
5. Both lenders and borrowers base their decisions on
c. nominal interest rate divided by the inflation rate.
a. expected real interest rates.
d. nominal interest rate times the inflation rate.
b. expected nominal interest rates.
e. federal funds rate.
c. real interest rates.
3. Which of the following will increase the demand for d. nominal interest rates.
loanable funds? e. Nominal interest rates minus real interest rates.
a. a federal government budget surplus
b. an increase in perceived business opportunities

Tackle the Test: Free-Response Questions
1. Draw a correctly labeled graph showing equilibrium in the 2. Does each of the following affect either the supply or the
loanable funds market. 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.
Answer (6 points)
b. Businesses are pessimistic about future business conditions.
1 point: Vertical axis labeled “Interest rate” or “r” c. The government increases borrowing.
d. The private savings rate decreases.
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

Interest
rate, r S

E
r E

D

Q E Quantity of loanable funds

module 29 The Market for Loanable Funds 287