Fin 4319-Chapter 2

Question 1

What are nominal interest rates?

Answer 1

The interest rates actually observed in financial markets.

Question 2

What is loanable funds theory?

Answer 2

A theory of interest rate determination that views equilibrium interest rates in financial markets as a result of the supply and demand for loanable funds.

Question 3

How does supply of loanable funds do in U.S financial markets?

Answer 3

The household sector is the largest supplier of loanable funds in the U.S in 2010. The greater the perceived risk of securities investment, the less households are willing to invest at each interest rate. Further, the supply of loanable funds from households also depends on their immediate spending needs. Near-term educational or medical expenditures will reduce the supply of funds from a given household.
Higher interest rates will also result in higher supplies of funds from the U.S. business sector.

Question 4

How do foreign investors do supply of loanable funds in U.S financial markets?

Answer 4

When interest rates are higher on U.S financial securities than they are on comparable in their home countries, forign investors increase their supply of funds to U.S markets.

Question 5

How do demand for loanable funds do in U.S?

Answer 5

In general, the quantity of loanable funds demanded is higher as interest rates fall.
Higher interest rates can cause state and local governments to postpone borrowings and thus capital expenditures.

Question 6

How do foreign participants do demand of loanable funds in U.S?

Answer 6

Households, businesses, governments look for the cheapest source of dollar funds globally.

Question 7

What is equilibrium interest rate meant?

Answer 7

It is