Module 29

Question 1

loanable fund market

Answer 1

hypothetical market that illustrates the outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders

Question 2

rate of return

Answer 2

profit earned on a project as a % of its cost

= (revenue - cost) / cost

Question 3

causes of shifts of demand for loanable funds

Answer 3

1) changes in perceived business opportunities / rates of return
2) changes in the government’s borrowing

Question 4

crowding out

Answer 4

when the govt deficit drives up the interest rate and leads to reduced investment spending and therefore lower AD

Question 5

causes of shifts of the supply of loanable funds

Answer 5

1) changes in private saving behavior

2) changes in capital inflows

Question 6

real interest rate

Answer 6

r = i - pi = nominal IR - inflation rate

=true cost of borrowing

Question 7

fisher effect

Answer 7

an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged