Question

1. Which statement about interest rates is false?
   a.   The supply of loanable funds is independent of the rate of interest
   b.   The equilibrium interest rate is determined by the intersection of the supply and demand schedules for loanable funds
   c.   Interest rates are affected by households' spending decisions
   d.   Interest rates typically reflect the risk involved in extending a loan

2. There will be pressure on the interest rate for loanable funds to increase when:
A. Supply increases

B. Quantity demanded exceeds the quantity supplied

C. Quantity supplied exceeds quantity demanded

D. Demand decreases

3. Which would cause an increase in interest rates in credit markets?
   a.   An increase in the supply of consumer saving
   b.   A decrease in business demand for credit
   c.   An increase in consumer demand for credit
   d.   An increase in the supply of business saving

4. As interest rates decrease, the:
   a.   Cost of current consumption relative to future consumption remains the same
   b.   Cost of current relative to future consumption increases
   c.   Desire of many individuals to save increases
   d.   Cost of current relative to future consumption decreases

5. Suppose a firm is considering the purchase of a machine which when used will increase its total revenues by $10,000 for the year. The machine costs $8,000 and has a useful life of one year. The interest rate is 20 percent. This investment should:
   a.   Not be undertaken because the rate of return is 7 percent less than the interest rate
   b.   Be undertaken because the rate of return is 7 percent greater than the interest rate
   c.   Be undertaken because the rate of return is 5 percent greater than the interest rate
   d.   Be undertaken because the rate of return is 2 percent greater than the interest rate

Answer 1

Answer 1 - The correct option is a. i.e supply of loanable funds is independent of the rate of the interest.

The supply of loanable funds (savings) is positively associated with the interest rate. When the interest rate rises, households spend less and save more which raises the supply of loanable funds.

Answer 2 - The correct option is B i.e quantity demanded exceeds the quantity supplied.

Demand curve of loanable funds slopes downward. However, the supply curve of loanable funds slopes upward. When quantity demanded of loanable funds exceeds supply, there is an excees demand for loanable funds which puts an upward pressure on interest rate.