Chapter 2

Question 1

Loanable funds theory

Answer 1

commonly used to explain interest rate movements, suggests that the market interest rate is determined by the factors that control the supply of and demand for loanable funds.

Question 2

Demands for funds

Answer 2

can be from households, businesses, and governments. each depending on market factors.

Question 3

interest-inelastic

Answer 3

insensitive to interest rates. (government demand)

Question 4

Equilibrium Interest Rate

Answer 4

Da - Dh+Db+Dg+Dm+Df (Aggregate = household, business, federal, municipal, and foreign demand)
This meets Supply in the same equation for the equilibrium

Question 5

Fisher Effect

Answer 5

nominal interest payments compensate savers in 2 ways. they compensate for a savers reduced purchasing power, and they provide an additional premium to savers for forgoing present consumption. The relationship between interest rates and expected inflation is known as the Fisher Effect.

Question 6

Forces that impact Interest Rates

Answer 6

Saving behavior that supplies funds to US. determines fiscal policy, determines taxes, determines disposable income. Monetary policy effects supply of funds in the US and foreign investors are influenced.

Question 7

Forecasting Interest Rates

Answer 7

Net Demand ND = Da-Sa. If the equilibrium is positive or negative will determine the outcome.