question
interest rate
answer
r, the return a lender receives for allowing borrowers the use of a dollar for one year, calculated as a percentage of the amount borrowed
question
why can interest rates be calculated with nominal terms?
answer
neither borrowers nor lenders know what the future inflation rate will be
question
loan contracts specify a __ rather
than a ___
than a ___
answer
nominal interest rate, real interest rate
question
loanable funds market
answer
shows the market
outcome of the demand for funds provided by borrowers and the supply of funds provided by lenders.
outcome of the demand for funds provided by borrowers and the supply of funds provided by lenders.
question
rate of return
answer
profit earned on the project (expressed as a
percentage of its cost)
percentage of its cost)
question
rate of return formula
answer
revenue-cost /cost * 100%
question
A business will want a loan when the rate of return on its project is
answer
greater than or equal to the interest rate
question
the lower the interest rate:
answer
the higher total quantity of loanable funds demanded
question
Governments that run budget deficits are major sources of
answer
the demand for loanable funds
question
An increase/decrease in the demand for loanable funds means that the
quantity of funds demanded
quantity of funds demanded
answer
rises/falls at any given interest rate
question
an increase in the government's deficit shifts the demand curve for loanable funds to the
answer
right, which leads to a higher interest rate
question
crowding out
answer
government deficit increases interest rate, leads to reduced investment spending
question
changes in the following will shift the demand curve
answer
business opportunities, gov't borrowing
question
changes in the following will shift the supply curve
answer
private savings, capital inflows
question
real interest rate =
answer
nominal interest rate - inflation
question
changing expectations about ___
which shift both the supply and the demand for loanable funds.
which shift both the supply and the demand for loanable funds.
answer
future inflation
question
both lenders and borrowers decide to lend/borrow based on
answer
real interest rate
question
fisher effect
answer
the expected real interest rate is unaffected by the change in expected future inflation
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