Question

The supply of loanable funds (the source of funds) consists of

Question 1 options:

	a) Total domestic saving and net foreign saving.
	b) Investment and net exports.
	c) Total domestic saving and investment.
	d) Only total domestic saving.

Question 2 (1 point)

Saved

Assuming all else held constant, an increase in net exports will lead to

Question 2 options:

	a) an increase in net foreign saving.
	b) a decrease in the source of funds.
	c) a decrease in the trade deficit.
	d) both a and c.
	e) both b and c.

Question 3 (1 point)

The demand for loanable funds (the use of funds) line is downward sloping because

Question 3 options:

	a) an increase in the real rate of interest causes investment spending to increase.
	b) an increase in income causes an increase in investment.
	c) an increase in income causes a decrease in investment.
	d) an increase in the real rate of interest causes investment spending to fall.

Question 4 (1 point)

According to the loanable funds model, which of the following will occur if there is an increase in government purchases (G)?

Question 4 options:

	a) A decrease in the supply of loanable funds.
	b) A stronger Canadian dollar.
	c) A decrease in consumption.
	d) All of the above are true,
	e) only a and b are true.

Question 5 (1 point)

Assuming all else held constant, if there is an improvement in business confidence, then we would expect

Question 5 options:

	a) a decrease in investment and an increase in the real rate of interest.
	b) a decrease in investment and a decrease in the real rate of interest.
	c) an increase in investment and an increase in the real rate of interest.
	d) an increase in investment and a decrease in the real rate of interest.

Answer 1

(1) (a)

Domestic saving is the supply (fund) of loanable funds.

(2) (e)

Since net exports (NX) equals net capital outflow (NCO), higher NX will increase NCO, so more capital will flow outside the country, lowering the supply of loanable funds. Also, higher NX lowers trade deficit.

(3) (d)

Interest rate and investment are inversely related, and investment is the demand for loanable funds.

(4) (b)

Higher government spending increases the demand for loanable funds. It increases interest rate, thus appreciating domestic currency.

(5) (c)

Higher business confidence increases investment, which increases the demand for loanable funds. Demand curve shifts right, increasing interest rate.