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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.
On a loanable funds market graph, show the effect of increased government borrowing.
The demand curve shifts right, increasing both the equilibrium interest rate and quantity of loanable funds.
On a loanable funds market graph, show the effect of increased consumer savings.
The supply curve shifts right, decreasing the equilibrium interest rate and increasing the quantity of loanable funds.
How does increased business investment affect the loanable funds market?
It shifts the demand curve for loanable funds to the right, increasing the equilibrium interest rate and quantity of loanable funds.
Illustrate the impact of decreased consumer confidence on the loanable funds market.
The demand curve shifts left, decreasing both the equilibrium interest rate and quantity of loanable funds.
How would a decrease in the supply of loanable funds affect the equilibrium?
The supply curve shifts left, increasing the equilibrium interest rate and decreasing the quantity of loanable funds.
What does the vertical axis represent in the market for loanable funds?
The real interest rate.
What does the horizontal axis represent in the market for loanable funds?
The quantity of loanable funds.
Explain how expected inflation is reflected in the loanable funds market.
Expected inflation influences both the supply and demand curves, affecting the equilibrium nominal interest rate.
Show the effect of a tax cut on savings on the loanable funds market graph.
The supply curve shifts right, leading to a lower equilibrium interest rate and a higher quantity of loanable funds.
How does a change in the risk associated with lending affect the supply of loanable funds?
Increased risk reduces the supply, shifting the supply curve left and increasing the equilibrium interest rate.
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.