Question 1

Forecasters should consider future plans for corporate expansion and the future state of the economy when forecasting business demand for loanable funds.

Accepted Answer

Forecasting business demand for loanable funds requires considering multiple factors, including future plans for corporate expansion and the state of the economy. These factors can significantly impact the amount of funds that businesses will require in the future, and as such, should be considered by forecasters in their projections.

Question 2

According to the Fisher effect, when the inflation rate is lower than anticipated, the real interest rate is relatively low.

Accepted Answer

According to the Fisher effect, when the inflation rate is lower than anticipated, the real interest rate is relatively higher, not lower, because the nominal interest rate adjusts more slowly to unexpected changes in inflation.

Question 3

The relationship between interest rates and expected inflation is often referred to as the loanable funds theory.

Accepted Answer

The relationship between interest rates and expected inflation is more commonly referred to as the Fisher effect or the inflation premium theory. The loanable funds theory focuses on the interaction of supply and demand for loanable funds in the market.

Question 4

To forecast interest rates using the Fisher effect, the real interest rate for an upcoming period can be forecasted by subtracting the expected inflation rate over that period from the nominalinterest rate quoted for that period.

Accepted Answer

This is the correct application of the Fisher effect formula, where the real interest rate is calculated as the nominal interest rate minus the expected inflation rate. By using this formula, analysts and investors can forecast where interest rates may be headed in the future based on expected changes in inflation.

Question 5

According to the Fisher effect, if the real interest rate is zero, the nominal interest rate must be equal to the expected inflation rate.

Accepted Answer

The Fisher effect states that the nominal interest rate is equal to the real interest rate plus the expected inflation rate. When the real interest rate is zero, the nominal interest rate must be equal to the expected inflation rate.

Question 6

If the aggregate demand for loanable funds increases without a corresponding increase in aggregate supply, there will be a surplus of loanable funds.

Accepted Answer

When the aggregate demand for loanable funds increases without a corresponding increase in aggregate supply, it leads to a shortage of loanable funds, not a surplus, because the demand exceeds the available supply.

Question 7

In general, suppliers of loanable funds are willing to supply more funds if the interest rate is higher.

Accepted Answer

This is because they will earn a higher return on their investment and it will incentivize them to save or invest more money.

Quiz 2: Determination of Interest Rates