Chapter 2 Assignment
1. The supply and demand for loanable funds
Which of the following is one of the reasons that the demand curve for loanable funds is
downward sloping?
A lower real interest rate discourages domestic investors from purchasing foreign
securities and encourages foreign investors to purchase domestic securities.
A lower real interest rate discourages people from saving.
A higher real interest rate makes borrowing more expensive.
A higher real interest rate encourages people to save.
Which of the following is one of the reasons that the supply curve for loanable funds is
upward sloping?
A lower real interest rate makes saving more appealing.
A higher real interest rate discourages domestic investors from purchasing
foreign securities and encourages foreign investors to purchase domestic securities.
A higher interest rate makes borrowing more expensive.
A higher real interest rate makes saving more appealing.
2. Sectors affecting the market for loanable funds
The loanable funds theory says that factors affecting the supply and demand for
loanable funds explain the fluctuations in the market interest rate. Before examining the
market for loanable funds in its entirety, it’s important to understand its individual
components.
Use the following table to determine whether each financial market participant
contributes to the supply of loanable funds or the demand for loanable funds in each
scenario. Then determine which sector the financial market participant contributes to:
business, federal government, foreign, household, or municipal government.
Hint: In each scenario, the United States is the domestic country.
Scenario
Supply or Demand for
Loanable Funds
Sector
A federal government runs a budget deficit
and needs to issue bonds in order to
compensate for the difference between tax
revenue and government expenditures.
Demand
Federal
Government
