Question

1. the result of a government crowding out the loanable funds market means:

a. a decrease in the real interest rate, crowding savers out of the loanable funds market
b. a decrease in the real interest rate, crowding borrowers out of the loanable funds market
c. increased government borrowing increases loanable funds, increases the real interest rate, and thus crowds private borrowers out of the loanable funds market.
d. increased government borrowing reduces loanable funds, increases the real interest rate and, thus, crowds private borrowers out of the loanable funds market.

1. as interest rates increase:

a. the incentive to save increases.
b. the incentive to borrow increases.
c. the incentive to save decreases.
d. it is impossible to determine a result with the information given.

1. which of the following is true regarding spending and saving?

Explanation:

• Question 7: When the government borrows more in the loanable - funds market, it reduces the supply of loanable funds available to private borrowers. This shortage causes the real interest rate to rise, making it more expensive for private borrowers to borrow, thus "crowding out" private borrowers.
• Question 8: Higher interest rates mean that savers can earn more on their savings. So, the incentive to save increases.

Answer:

• 7. D. Increased government borrowing reduces loanable funds, increases the real interest rate and, thus, crowds private borrowers out of the loanable funds market.
• 8. A. The incentive to save increases.