Financial capital is the money used to buy stocks and bonds money used to buy ph

Question

Financial capital is the money used to buy stocks and bonds money used to buy physical capital funds that savers supply and buyers of physical capital borrow money in the bank If the price of a U.S. government bond is $50 and the owner of the bond entitled to $2.50 income each year, then the interest rate on the bond is 0.2 percent 5 percent 10 percent 20 percent In the loanable funds market, an increase in A. the real interest rate increases the demand for loanable funds expected profit increases the demand for loanable funds expected profit doesn't change the demand for loanable funds, buti quantity of loanable funds demanded increases the real interest rate doesn't change the demand for loanable uim the quantity of loanable funds demanded increases The supply of loanable funds increases when the demand for loanable funds increases when people increase saving as the real interest rate rises when disposable income increases or wealth decreases if net taxes decrease or expected future income increase-

Explanation / Answer

1) Financial capital is the capital invested in the financial market, which cannot be restricted to mere the investment in physical capital or money invested in stocks. Hence the answer should be C.

2) An income of $2.5 on an investment of $50 implies a return of 5% (2.5/50*100). Hence the correct option is B

3) In the market for loanable funds, equilibrium interest rate is determined when the supply of loanable funds (Savings) equilibrates the demand for loanable funds (Desired investment).This implies an increase in the interest rate brings an upward movement along a demand curve showing a contraction in the demand. Hence option A and D are incorrect.

Profits do encourage more investment so the demand may rise. Hence option B is correct.

4) Note that quantity supplied changes when there is an opposite change in the interest rate and there is no shift of the supply curve. It shifts only when there is a change in factors other than the interest rate. Increase in disposable income and wealth implies more savings.

Hence, supply of loanable funds shifts to the right. So option C

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