TRUE/ FALSE 1)If market participants expect higher inflation in the future, the
ID: 1192595 • Letter: T
Question
TRUE/ FALSE
1)If market participants expect higher inflation in the future, the quantity of loanable funds demanded will increase. This will cause a movement along the demand function for loanable funds.
2) If market participants expect higher inflation in the future, the quantity of loanable funds supplied will increase. This will cause a movement along the supply function for loanable funds.
3) If the nominal interest rate increases, the quantity of loanable funds demanded will increase. This will cause a movement along the demand function for loanable funds.
4) If the nominal interest rate decreases, the quantity of loanable funds supplied will increase. This will cause a shift in supply function for loanable funds.
5) If firms and households expect better economic conditions in the future, demand for loanable funds will shift to the right.
6) If credit risk increases, supply of loanable funds will shift to the right.
Explanation / Answer
1. False. Of all the determinant of demand for loanable funds, only change in nominal interest rate causes a movement along the demand curve; all other determinants can only cause a shift.
2. False. Of all the determinant of supply of loanable funds, only change in nominal interest rate causes a movement along the supply curve; all other determinants can only cause a shift.
3. False. If the nominal interest rate increases, the quantity of loanable funds demanded will DECREASE.
4. False. If the nominal interest rate decreases, the quantity of loanable funds supplied will DECREASE.
5. True. When firms foresee more profit opportunities, their demand for loanable funds increases and the demand curve shifts righwards.
6. False. When households see more credit risk, they curtail lending, thereby leading the supply curve of loanable funds to shift leftwards.
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