All Flashcards
If nominal interest rate is 8% and inflation is 3%, what is the real interest rate?
Real interest rate = 8% - 3% = 5%
How does unexpected high inflation affect borrowers?
Borrowers benefit as they repay loans with money that has less purchasing power than expected.
How does unexpected high inflation affect lenders?
Lenders are hurt because they receive repayments with less purchasing power than they anticipated.
If actual inflation is lower than expected, who benefits?
Lenders benefit because the real interest rate is higher than anticipated.
How do economists use expected inflation rates?
To set nominal interest rates, factoring in what they think inflation will be in the future.
How does an increase in government borrowing affect interest rates?
Increases demand for loanable funds, potentially raising real interest rates.
Explain how consumer confidence affects the loanable funds market.
Increased consumer confidence can increase borrowing, shifting the demand curve for loanable funds to the right and potentially raising interest rates.
What happens to real interest rates when nominal interest rates remain constant but inflation increases?
Real interest rates decrease because the purchasing power of the returns diminishes.
If the nominal interest rate is 6% and the real interest rate is 2%, what is the inflation rate?
Inflation rate = 6% - 2% = 4%
How does a decrease in business investment impact the demand for loanable funds?
It decreases the demand, shifting the demand curve to the left and potentially lowering interest rates.
How does expansionary monetary policy affect nominal interest rates?
It typically lowers nominal interest rates to stimulate borrowing and investment.
How does contractionary monetary policy affect nominal interest rates?
It typically raises nominal interest rates to reduce inflation.
What is the effect of increased government spending on real interest rates?
Increased government spending can increase demand for loanable funds, potentially raising real interest rates.
How do tax incentives for savings affect the supply of loanable funds?
They increase the supply of loanable funds, potentially lowering real interest rates.
What is the impact of a government budget surplus on the market for loanable funds?
It increases the supply of loanable funds, potentially lowering real interest rates.
How does fiscal policy influence the demand for loanable funds?
Government borrowing to finance deficits increases demand; tax policies affecting investment can also shift demand.
What is the effect of quantitative easing on interest rates?
Quantitative easing typically lowers interest rates by increasing the money supply and purchasing government bonds.
How does the central bank influence nominal interest rates?
Through tools like the federal funds rate and the discount rate, influencing the cost of borrowing for banks.
What is the impact of inflation targeting on nominal interest rates?
Central banks adjust nominal interest rates to maintain the target inflation rate.
How do international capital flows affect domestic interest rates?
Inflows increase the supply of loanable funds, potentially lowering rates; outflows decrease supply, potentially raising rates.
Compare nominal interest rate and real interest rate.
Nominal is the stated rate; real is adjusted for inflation. Real reflects the true return/cost.
Differentiate between the market for loanable funds and the money market.
Loanable funds deal with long-term investments/savings; money market focuses on short-term lending/borrowing.
Compare nominal GDP and real GDP.
Nominal GDP is measured in current prices; real GDP is adjusted for inflation.
What is the difference between expected and actual inflation?
Expected inflation is the anticipated rate; actual inflation is the rate that actually occurs.
Compare the impact of unexpected inflation on borrowers and lenders.
Borrowers benefit from unexpected inflation; lenders are hurt.
Contrast the effects of expansionary and contractionary monetary policy on interest rates.
Expansionary policy typically lowers interest rates; contractionary policy typically raises them.
Compare the effects of a government budget surplus and a government budget deficit on the loanable funds market.
A surplus increases the supply of loanable funds, while a deficit increases the demand.
Differentiate between the supply and demand sides of the loanable funds market.
Savers supply loanable funds; borrowers demand loanable funds.
Compare the effects of increased consumer confidence and decreased consumer confidence on the demand for loanable funds.
Increased confidence increases demand; decreased confidence decreases demand.
Contrast the impact of increased business investment and decreased business investment on the loanable funds market.
Increased investment increases demand; decreased investment decreases demand.