Economics Supply And Demand- Loanable Funds Market/Investment Demand – Flashcards
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economics
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social science concerned with how to make the best choices under the condition of scarcity; traditionally how to optimize unlimited wants with limited resources
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macroeconomics
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big picture. examines activities of entire sectors of society
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four sectors
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household, business, government, international
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we usually graph in
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quadrant 1
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which sectors borrow from econ land bank?
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household, business and government
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who deposits in the econ land bank?
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households
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who takes loans from the econ land bank?
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households, businesses and governments
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supply of loanable funds
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the amount of stuff available
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demand
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the wants of the consumers
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what is on the y axis of a loanable funds market graph?
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real interest rate
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what is on the x axis of a loanable funds market graph?
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quantity of loanable funds
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equilibrium
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when the supply and demand meet. magic agreement when both are happy
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Adam Smith
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George Washington of economics. invisible hand
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invisible hand
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keeps/brings things to equilibrium
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issuer
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debtor
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coupon
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interest rate
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nominal
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in name/#
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inflation
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prices of stuff rising
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real interest rate =
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nominal interest rate-rate of inflation
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less money borrowed for
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higher interest rates
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more money borrowed for
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lower interest rates
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less money saved for
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lower interest rates
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more money saved for
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higher interest rates
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a loanable funds graph is
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directly proportional. there is a direct or positive connection, they move together
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loans
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borrowed money which is paid back by installments plus interest. Loans are issued for a fixed time period.
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banks
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financial institutions that accept deposits and make loans
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where does the supply come from in econ land?
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savings deposits from households
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where does the demand come from in econ land?
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households, businesses and governments who want to borrow money
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shift to the left
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less, decrease for both supply and demand
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shift to the right
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more, increase for both supply and demand
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what happens if the supply increases?
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the interest increases
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what happens if household saving increases?
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supply increases, demand stays the same
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if supply increases does demand do the same?
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not necessarily
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quantity supplied = quantity demand in what?
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equilibrium
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Assume that the government wants to borrow more money than before. How would this affect the loanable funds market and interest rates?
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Demand increases, quantity of funds supplied increases, interest rates increase, quantity of funds demanded increases
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Assume households increase their savings (in banks). How would this affect the loanable funds market and interest rates?
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quantity of funds supplied increases, supply increases, interest rates decrease, quantity of funds demanded increases
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Assume that businesses feel pessimistic about the future and therefore do not want to buy as much real capital (machines to help production) as before. To buy machines, businesses borrow money from banks. Because they don't want the machines, they do not want to borrow as much money as before. How would this affect the loanable funds market and interest rates?
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Demand decreases, quantity of funds supplied decreases, interest rates decrease, quantity of funds demanded decreases
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Borrowers are ________ of loanable funds, and lenders are ________ of loanable funds.
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demanders; suppliers
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The demand for loanable funds has a ________ slope because the lower the interest rate, the ________ number of investment projects are profitable, and the ________ the quantity of
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negative; greater; greater
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The supply of loanable funds has a ________ slope because the greater the interest rate, the ________ the reward to saving, and the ________ the quantity of loanable funds supplied.
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positive; greater; greater
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A decrease in the real interest rate will
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increase consumption and investment.
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What will increase the real interest rate?
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an increase in the demand for loanable funds
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If technological change increases the profitability of new investment for firms, then the ________ curve for loanable funds will shift to the ________ and the equilibrium real interest rate will ________.
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demand; right; rise
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What does an increase in the real interest rate do?
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reduces consumption spending
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An increase in public saving has what impact on the market for loanable funds?
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The supply of loanable funds increases.
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If consumers decide to be more frugal and save more out of their income, then this will cause
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a shift in the supply curve for loanable funds to the right.
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Using the market for loanable funds, which of the following has the potential to raise the real interest rate?
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an increase in the demand for loanable funds
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capital goods
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manufactured aides to production (what businesses buy)
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A business buys soothing for $1million with 1% return. How much money will they end up with? What is the equation?
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$1million, $10thousand. price+return
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Equation for rate of return =
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(revenue from capital - cost of capital)/(cost of capital)
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Illustrate an Investment Demand curve for an economy with properly labelled axes. Assume that this economy's real interest rate is presently 6% and that planned Gross Investment spending at this interest rate is $20 million. Show this point of operation on the curve using guidelines that extend to each axis.
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look at notes
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The Investment Demand curve uses "real interest rates" as a measure. The real rate of interest is the nominal rate of interest minus the rate of ____________.
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inflation
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A firm is deciding wheter or not to invest in a new machine that costs $3,000 but which is expected to produce an increase in total revenue of $3,300. The current nominal rate of interest is 8% with no inflation expected. The firm [a] (should / should not) undertake the investment because the expected rate of return of [b]% is [c] (less than / greater than) the real rate of interest of [d]%
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a. should b. 10 c. greater than d. 8
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A business is trying to decide if it should buy a machine that costs $100. The machine is expected to increase total revenue $105 and inflation is expected to be 3%. If the nominal interest rate is 9%, [a] (should / should not) undertake the investment because the expected rate of return of [b]% is [c] (less than / greater than) the real rate of interest of [d]%.
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a. should not b. 5 c. less than d. 6
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What effect will an increase in real interest rates have on the investment demand curve?
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the curve will not shift but society will move to a point higher up the curve
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What effect will a decrease in real interest rates have on the investment demand curve?
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the curve will not shift but society will move to a point lower down along the curve
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What effect will an increase in business sector optimism have on the investment demand curve?
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shift the curve right
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What effect will an increase in business taxes have on the investment demand curve?
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shift the curve left
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What effect will an increase in maintenance and operating costs have on the investment demand curve?
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shift the curve left
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What effect will an increase in the price level have on the investment demand curve?
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the curve will not shift but society will move to a point higher up the curve. Higher price level will cause the demand for loaned money to increase. This causes real interest rates to increase. When real interest rates increase, the investment demand curve does not shift but moves to a point along the curve that corresponds to higher real interest rates.
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what distinguishes an investment demand curve graph?
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it only has demand not supply
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Where does the investment demand curve graph get its real interest rate from?
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the market graph. puppy dog lean
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For an investment demand curve graph when interest rate decreases there is
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no change in investment demand
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For an investment demand curve graph as interest rates increase
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quantity of gross investment spending decreases
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what is on the x axis of an investment demand curve graph?
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quantity of gross investment spending (buying of capital)
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what is on the y axis of an investment demand curve graph?
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real interest rates
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For an investment demand curve graph does interest change when the curve shifts?
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no
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For an investment demand curve graph when interest rates decrease
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quantity of investment demanded increased
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investment spending
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how much businesses spend on capital
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For an investment demand curve graph when does the shift happen?
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when companies want to buy more/less capital than before
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What are the six things that cause the shift in the investment demand curve graph or cause companies to spend less or more?
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subsidies, stock of capital on hand, technology, acquisition costs, business taxes, maintenance & operating costs
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subsidies
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opposite of tax. when the government gives money away. ex: money given to farmers, medical things, colleges, big industries to establish in their town
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increase in subsidies for an investment demand curve graph means
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an increase in investment demand
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stock of capital on hand
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how much businesses already have or own ex: something that could impact this is a disaster
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decreased stock for an investment demand curve graph means
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increased investment demand or spending
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technology
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improvements increase investment demand
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acquisition costs
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the cost it takes to get the product ex: shipping, transportation, etc.
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an increase in acquisition costs for an investment demand curve graph means
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a decrease in investment demand
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business taxes
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when the government takes money from a business
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if business taxes drop what does that mean (for an investment demand curve graph)?
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more spending and increased investment demand
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taxes
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fees for the support of government required to be paid by people and businesses. its mandatory
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personal taxes
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income taxes and property taxes paid by any person who makes money. Major source of government revenue
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Which gives the government more money, personal taxes or business taxes?
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personal taxes
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maintenance and operating costs
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costs to pay maintenance or to clean, etc.
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if maintenance and operating costs for an investment demand curve graph increase what happens to the investment demand?
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it decreases
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consumer
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when people are buying things
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when you buy things for yourself using the businesses' or government's money
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fraud
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what are some examples of business capital?
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things that help them make a profit so machines but also things like chairs and desks to help them focus
