Question

In a large open? economy, how would each of the following events affect the equilibrium interest? rate?

A natural disaster causes extensive damage to? homes, bridges, and? highways, leading to increased investment spending to repair the damaged infrastructure.

A. The supply of loanable funds would? increase, decreasing the interest rate.

B. The supply of loanable funds would? decrease, increasing the interest rate.

C. The demand for loanable funds would? increase, increasing the interest rate.

D. The demand for loanable funds would? decrease, decreasing the interest rate.

Taxes on businesses are expected to be increased in the future.

A. The supply of loanable funds would? decrease, increasing the interest rate.

B. The supply of loanable funds would? increase, decreasing the interest rate.

C. The demand for loanable funds would? decrease, decreasing the interest rate.

D. The demand for loanable funds would? increase, increasing the interest rate.

The World Cup soccer matches are being? televised, and many people stay home to watch? them, reducing consumption spending.

A. The supply of loanable funds would? increase, decreasing the interest rate.

B. The demand for loanable funds would? increase, increasing the interest rate.

C. The supply of loanable funds would? decrease, increasing the interest rate.

D. The demand for loanable funds would? decrease, decreasing the interest rate.

The government proposes a new tax on? saving, based on the value of? people's investments as of December 31 each year.

A. The demand for loanable funds would? increase, increasing the interest rate.

B. The supply of loanable funds would? decrease, increasing the interest rate.

C. The demand for loanable funds would? decrease, decreasing the interest rate.

D. The supply of loanable funds would? increase, decreasing the interest rate.

Answer 1

(1) Option (C)

An increase in investment will increase the demand for loanable funds, shifting the demand curve rightward which will increase the interest rate.

(2) Option (C)

Higher future business tax will slow down business investment. A decrease in investment will decrease the demand for loanable funds, shifting the demand curve leftward which will decrease the interest rate.

(3) Option (A).

Income remaining unchanged, lower consumption will increase savings which is a supply of loanable funds. The supply curve will shift rightward, decreasing interest rate.

(4) Option (B)

New tax on saving will effectively lower the after-tax income from savings, thus decreasing savings, which is a supply of loanable funds. The supply curve will shift lefward, increasing interest rate.