Question

10. The sources of supply and demand for loanable funds

Consider the market for loanable funds in the United States.

Which of the following are sources of the supply of loanable funds? Check all that apply.

A- A household’s current after-tax income exceeds its utility-maximizing level of consumption.

B- Government tax revenues exceed government spending.

C- A firm’s profit-maximizing level of expenditures exceeds its profits in the current period.

D- A government runs a budget deficit.

E- A household’s utility-maximizing level of consumption exceeds its current after-tax income.

F- A firm’s revenues in the current period exceed its profit-maximizing level of expenditures.

An increase in the interest rate _________ ( decreases / increases) the pool of loanable funds for which of the following reasons? Check all that apply.

A- Firms lend more of their cash through U.S. financial markets.

B- Households withdraw funds from financial markets.

C- Foreigners bring more of their savings to the pool of loanable funds.

D- Households save more of their after-tax income.

Answer 1

(1) Following are sources of loanable funds:

A - A household’s current after-tax income exceeds its utility-maximizing level of consumption [= private saving]

B - Government tax revenues exceed government spending [= public saving]

F - A firm’s revenues in the current period exceed its profit-maximizing level of expenditures [= business saving]

(2) An increase in the interest rate Increases the pool of loanable funds (supply of loanable funds).

The reasons are:

A - Firms lend more of their cash through U.S. financial markets.

C - Foreigners bring more of their savings to the pool of loanable funds.

D - Households save more of their after-tax income.