Loanable Funds and Crowding Out

Loanable Funds and Crowding Out

1. 1. In the loanable funds market, what is the price that clears the market for borrowing and lending?

   The inflation rateThe real interest rateThe nominal interest rateThe federal funds rate

2. 2. When the government runs a budget deficit, how does the supply of loanable funds change?

   Supply increases because government borrowing adds funds to the marketSupply decreases because government saving is negative, reducing the total pool of fundsSupply remains unchanged; only demand shiftsSupply becomes infinitely elastic at the current interest rate

3. 3. As the real interest rate rises in the loanable funds market, which of the following occurs?

   Investment increases and saving decreasesInvestment decreases and saving increasesBoth investment and saving increaseBoth investment and saving decrease

4. 4. When a government deficit shifts the supply of loanable funds left, which of the following are consequences in the new equilibrium? (Select all that apply.)

   The real interest rate risesPrivate investment fallsThe rise in the real interest rate stimulates additional private savingThe deficit completely displaces all new investment

5. 5. Suppose a government deficit of $300 billion reduces the supply of loanable funds by $300 billion at each interest rate. If the new equilibrium real interest rate rises enough to elicit an additional $120 billion of private saving, how much investment is crowded out (in billions of dollars)?

   billions of dollars