Suppose Households Decide to Reduce Savings Because They Want to Enjoy

question 75

Multiple Choice

Suppose households decide to reduce savings because they want to enjoy more present time than future time.In this case,the loanable funds model predicts that

• A) interest rate goes down, and quantity of borrowed funds increases.
• B) interest rate goes down, and quantity of borrowed funds decreases.
• C) interest rate goes up, and quantity of borrowed funds decreases.
• D) interest rate goes up, and quantity of borrowed funds increases.

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Definitions:

Nominal Rate

The stated interest rate of a financial product, not accounting for inflation or compounding effects.

Compounded Quarterly

Refers to the method of applying interest to an existing principal amount and any accrued interest every quarter or three months.

Effective Yield

A measure of the return on an investment, taking into account the effect of compounding interest.

Simple Annualized

A method of calculating the return on an investment by annualizing its simple interest without accounting for compounding.