Question

Under which of the following conditions would people desire to borrow the most?
A. the nominal rate of interest is 4 percent and the inflation rate is 2 percent.
B. the nominal rate of interest is 5 percent and the inflation rate is 2 percent.
C. the nominal rate of interest is 6 percent and the inflation rate is 1 percent.
D. the nominal rate of interest is 7 percent and the inflation rate is 1 percent.
E. the nominal rate of interest is 8 percent and the inflation rate is 2 percent

which of the following statements is NOT correct?
A. Saving is an important long-run determinant of a nation's standard of living.
B. A change in tax laws that encouraged greater saving would lower interest rates.
C. Taxes on interest income can substantially decrease the future value of current saving.
D. An increase in the demand for loanable funds increases the equilibrium interest rate and increases the equilibrium level of saving.
E. American families save a larger fraction of their incomes than their counterparts in many other countries such as Germany and Japan.

Suppose the government decreased the amount of interest income that was income tax-free (tax exempt) from the amount of $20,000 to a lower amount of $5,000. As a result, an economist would expect the _______ of/for loanable funds would shift to the _______ and that would cause a _______ in the interest rate.
A. demand; left; fall.
B. demand; right; rise
C. supply; right; fall.
D. supply; left; fall.
E. supply; left; rise.

If the government reduced the tax on interest income, saving would _______, the interest rate would ______, and investment spending would _________.
A. decrease; rise; decrease.
B. decrease; fall; increase.
C. increase; rise; increase.
D. increase; fall; increase.
E. increase; fall; decrease.

Answer 1

(1) (A)

Real rate = Nominal rate - Inflation rate

Borrowers will prefer the option with minimum real rate which is 2% (= 4% - 2%) in option (A).

(2) (E)

Average personal saving rate in US is 7-8% while it is 10% in Germany and 25% in Japan.

(3) (E)

Lowering the limit of tax-exempt interest income will cause people to save less, which reduces supply of loanable funds, shifting supply curve leftward and increasing interest rate.

(4) (D)

Lower tax on interest income will cause people to save more, which increases supply of loanable funds, shifting supply curve rightward, decreasing interest rate and increasing savings and investment.