Soar to Savings

Which is responsible for setting the interest rate borrowers pay for a loan?

	A. The government
	B. Banks
	C. Supply and demand
	D. How much money is available to lend

That's incorrect. The correct answer is C. The interest rate is a price determined in the same way the price of a good or service is determined. It is the result of the interaction of supply and demand.

That's correct. The interest rate is a price determined in the same way the price of a good or service is determined. It is the result of the interaction of supply and demand.

If people were to save more money, how would real interest rates be affected?

	A. Interest rates would rise due to the increase in demand.
	B. Interest rates would fall due to the decrease in demand.
	C. Interest rates would fall due to the increase in supply.
	D. Interest rates would rise due to the decrease in supply.

That's incorrect. The correct answer is C. An increase in saving increases the supply of loanable funds, which decreases the real interest rate.

That's correct. An increase in saving increases the supply of loanable funds, which decreases the real interest rate.

If people were to save more money, how would investment spending be affected in a closed economy?

	A. Companies would buy more stocks.
	B. Companies would buy more tools and equipment.
	C. Companies would reduce their spending on tools and equipment.
	D. Companies would buy more bonds.

That's incorrect. The correct answer is B. In a closed economy, saving and investment are equal: An increase in saving will result in an increase in investment, which means an increase in capital spending.

That's correct. In a closed economy, saving and investment are equal: An increase in saving will result in an increase in investment, which means an increase in capital spending.

According to the paradox of thrift:

	A. Increased spending would generate economic activity and job creation.
	B. Increased spending would decrease the interest rates for loanable funds.
	C. Increased spending would also increase saving.
	D. Increased spending would increase the unemployment rate.

That's incorrect. The correct answer is A. One person's spending is another person's income, so more spending translates into more economic activity, production and employment in the short run.

That's correct. One person's spending is another person's income, so more spending translates into more economic activity, production and employment in the short run.