MyEconLab 6
Let: (1) Pt be the price of one unit of a market basket of goods (i.e., a composite commodity) in year t; (2) Pet+1 be the expected price of one unit of a market basket of goods in year t+1; (3) pi et+1 be the expected rate of inflation between period t and t+1; and (4) it be the one-year nominal interest rate. Suppose an individual borrows the equivalent of one unit of a composite commodity today. Given this information, which of the following expressions represents (i.e., is equal to) the amount of the composite commodity one must repay in one year? A. (1 + it)(Pet+1)/(Pt) B. {(1 + pi et+1)/(1 + it)} minus 1 C. {(1 + it)(Pt)/(Pet+1)} minus 1 D. (1 + pi et+1)/(1 + it) E.
(1 + It)(p(t+1)^e)/(Pt)
Given the zero lower bound on the nominal rate, the lowest real interest rate the central bank can achieve is A. -pi^e B. i. C. pi Superscript e . D. 0.
A. -pi^e
If the nominal interest rate 8% and expected inflation 3%, the expected real interest rate in year t is approximately: A. 5% B. 8% C. 2% D. 3% E. 11%
A. 5%
Suppose that the nominal interest rate and expected inflation both decrease by 2%. Given this information, we would expect which of the following to occur? A. an increase in money demand B. a reduction in investment C. a reduction in the real interest rate D. an increase in the real interest rate E. both A and C
A. an increase in money demand
For a given nominal interest rate, a reduction in expected inflation will cause: A. an increase in the real interest rate B. a reduction in the real interest rate C. an increase in investment D. an increase in money demand
A. an increase in the real interest rate
The leverage ratio is the ratio of a bank's A. assets divided by capital. B. capital divided by its total liabilities. C. assets divided by its liabilities. D. income divided by its assets.
A. assets divided by capital.
Which of the following is NOT part of a bank's assets? A. checkable deposits B. reserves C. loans D. government bonds
A. checkable deposits
Which of the following long-term bonds has the highest interest rate? A. corporate BBB bonds B. corporate AAA bonds C. municipal bonds D. U.S. Treasury bonds
A. corporate BBB bonds
The process of indirect finance using financial intermediaries is called A. financial intermediation. B. direct lending. C. financial liquidation. D. resource allocation.
A. financial intermediation.
Holding large amounts of bank capital helps prevent bank failures because A. it can be used to absorb the losses resulting from bad loans. B. it makes loans easier to sell. C. it makes it easier to call in loans. D. it means that the bank has a higher income.
A. it can be used to absorb the losses resulting from bad loans.
With a nominal interest rate of 10% per year, the present discounted value of $200 to be received in two years is A. $165.29 B. $82.64 C. $220.00 D. $181.82 E. $90.91
A. $165.29
If the nominal interest rate is 20% per year, how much money can an individual borrow today if she wants to repay $100 in one year? A. $83.33 B. $80.00 C. $78.00 D. $120.00 E. $121.00
A. $83.33
If the expected real interest rate 5% and expected inflation 3%, the nominal interest rate in year t is approximately A. 8%. B. 5%. C. 11%. D. 3%. E. 2%.
A. 8%.
Suppose bank A has assets of 100, liabilities of 80, and capital of 20. Its leverage ratio is A. 9. B. 4. C. 5. D. 10.
C. 5.
Which of the following statements is false? A. A bank issues liabilities to acquire funds. B. The bank's assets provide the bank with income. C. Bank capital is recorded as an asset on the bank balance sheet. D. A bank's assets are its uses of funds.
C. Bank capital is recorded as an asset on the bank balance sheet.
Which of the following long-term bonds has the lowest interest rate? A. corporate BBB bonds B. corporate AAA bonds C. U.S. Treasury bonds D. municipal bonds
C. U.S. Treasury bonds
The capital ratio is the ratio of a bank's A. assets divided by its liabilities. B. capital divided by its total liabilities. C. capital divided by its assets. D. income divided by its assets.
C. capital divided by its assets.
The policy rate is A. a risk premium. B. entering the IS equation. C. determined by monetary policy. D. a real interest rate.
C. determined by monetary policy.
For this question, assume that expected inflation is zero. In this situation, we know that: A. the real interest rate is negative B. the real interest will be zero C. the nominal and real interest rates are equal D. the nominal interest rate will exceed the real interest rate E. the real interest rate will exceed the nominal interest rate
C. the nominal and real interest rates are equal D.
The present discounted value of a future payment becomes smaller when A. the nominal interest rate decreases. B. the payment is made sooner rather than later. C. the payment itself decreases. D. all of the above. E. none of the above.
C. the payment itself decreases.
The borrowing rate is A. determined by monetary policy. B. a nominal interest rate. C. the rate at which consumers and firms can borrow. D. a risk premium.
C. the rate at which consumers and firms can borrow.
Because expected inflation is typically positive, we know that: A. the nominal and real interest rates are generally equal B. the real interest rate is approximately equal to zero C. the real interest rate is generally less than the nominal interest rate D. the nominal interest rate is generally less than the real interest rate
C. the real interest rate is generally less than the nominal interest rate
For this question, assume that expected inflation is equal to the nominal interest rate. In this situation, which of the following is correct? A. the real interest rate is negative B. the real interest rate is higher than the nominal interest rate C. the real interest rate is zero D. the real interest rate is positive
C. the real interest rate is zero
Suppose the nominal interest rate is zero. In this situation, the present discounted value of a finite sequence of future payments is equal to which of the following? A. zero. B. the average value of each payment. C. the sum of all payments. D. the sum of the all payments divided by the rate of inflation . E. the square of the sum of all payments.
C. the sum of all payments.
With a nominal interest rate of 10%, the present discounted value of $200 to be received in one year is A. $165.29 B. $90.91 C. $181.82 D. $190.00 E. $220.00
C. $181.82
Risk premiums on corporate bonds tend to ________ during business cycle expansions and ________ during recessions, everything else held constant. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease
C. decrease; increase
Data on real and nominal interest rates of oneminus year U.S. Tminus Bills show that, over the past twenty years, A. whenever the nominal rate rises, the real rate falls, and vice versa. B. the real rate has varied, but the nominal rate has not. C. the nominal rate has always been less than the real rate. D. the nominal rate has varied, but the real rate has not. E. the real rate has always been less than the nominal rate.
E. the real rate has always been less than the nominal rate.
If the nominal interest rate is less than the real interest rate, we know that A. both the nominal or real interest rate must be negative. B. the nominal interest rate must be equal to expected inflation. C. expected inflation must be zero. D. expected inflation must be positive. E. expected deflation must be occurring.
E. expected deflation must be occurring.
Whenever the expected inflation rate is positive: A. the nominal interest rate must be equal to the real interest rate. B. the real interest rate is negative. C. the real interest rate is positive. D. the real interest rate is greater than the nominal interest rate. E. none of the above.
E. none of the above.
An increase in the nominal interest rate, all else held constant, will always cause which of the following? A. the demand for money to increase. B. the real interest rate to decrease. C. the expected inflation rate to decrease. D. all of the above. E. none of the above..
E. none of the above..
Let: (1) Pt be the price of one unit of a market basket of goods (i.e., a composite commodity) in year t; (2) Pet+1 be the expected price of one unit of a market basket of goods in year t+1; (3) pi et+1 be the expected rate of inflation between period t and t+1; and (4) it be the one-year nominal interest rate. Suppose an individual borrows the equivalent of one unit of a composite commodity today. Given this information, which of the following expressions represents (i.e., is equal to) the real interest rate (rt)? A. (1 + pi et+1)/(1 + it) B. (1 + it)(Pet+1)/(Pt) C. {(1 + pi et+1)/(1 + it)} minus 1 D. {(1 + it)(Pt)/(Pet+1)} minus 1 E. none of the above
{(1 + It)(Pt)/(Pt+1^e)} - 1
With a constant nominal interest rate equal to i, the present discounted value of $1.00 to be received 4 years from today is equal to A. 1+i B. (1+i)4 C. 4(1+i) D. i4 E. 1/(1+i) 4
1/(1+i)^4
Firms with _____ ratings are considered the safest. A. BBB B. AAA C. BB D. CCC
B. AAA
Which of the following statements are true? A. A bank's assets are its sources of funds. B. A bank's balance sheet shows that total assets equal total liabilities plus equity capital. C. A bank's liabilities are its uses of funds. D. A bank's balance sheet indicates whether or not the bank is profitable.
B. A bank's balance sheet shows that total assets equal total liabilities plus equity capital.
Which of the following are reported as liabilities on a bank's balance sheet? A. deposits with other banks B. checkable deposits C. consumer loans D. reserves
B. checkable deposits
When x increases leading decrease in output, a better policy tool is A. increase in policy rate. B. decrease in policy rate. C. decrease in government spending. D. increase in government spending.
B. decrease in policy rate.
Because the nominal interest rate is always positive, the discount factor is always: A. greater than one B. less than one C. zero D. negative
B. less than one
How many interest rates were there in the IS-LM model in Chapter 5? A. three B. one C. two D. zero
B. one
When individuals make decisions about how much money and bonds to hold, which of the following variables affects those decisions? A. the real interest rate only. B. the nominal interest rate only. C. either the real interest rate or the expected inflation rate. D. both the nominal and real interest rates. E. the expected inflation rate only.
B. the nominal interest rate only.
Under which of the following assumptions would the nominal interest rate be equal to the real interest rate? A. Expected inflation is equal to the real interest rate. B. Expected inflation is equal to the nominal interest rate. C. Expected inflation is negative. D. Expected inflation is equal to zero. E. none of the above.
D. Expected inflation is equal to zero.
When x increases A. LM curve shifts downward. B. LM curve shifts upward. C. IS curve shifts to the right. D. IS curve shifts to the left.
D. IS curve shifts to the left.
Channeling funds from individuals with surplus funds to those desiring funds when the saver does not purchase the borrower's security is known as A. taxation. B. barter. C. redistribution. D. financial intermediation.
D. financial intermediation.
If the expected inflation rate is negative, the expected real interest rate must be A. equal to the nominal interest rate. B. negative. C. less than the nominal interest rate. D. greater than the nominal interest rate. E. none of the above
D. greater than the nominal interest rate.
A bank is insolvent when A. its assets increase in value. B. its capital exceeds its liabilities. C. its assets exceed its liabilities. D. its liabilities exceed its assets.
D. its liabilities exceed its assets.
Which of the following will NOT cause an increase in the present value of a sequence of payments? A. a reduction in expected future interest rates B. an increase in a future expected payment C. a reduction in the current interest rate D. none of the above
D. none of the above
The new term introduced in the extended IS-LM model is A. nominal interest rate. B. taxes. C. G. D. risk premium.
D. risk premium.
Which of the following best defines the real interest rate (r)? A. the amount of dollars we must give up today in order to consume more goods today. B. the amount of dollars we must give up next year in order to consume more goods today. C. the amount of dollars we must give up today in order to have more dollars next year. D. the amount of goods we must give up next year in order to consume more goods today. E. the amount of dollars we must give up next year in order to have more dollars today.
D. the amount of goods we must give up next year in order to consume more goods today.
The nominal interest rate is A. the interest rate measured in terms of goods. B. equal to the real interest rate minus the rate of inflation. C. equal to the expected rate of inflation. D. the type of interest rate typically reported in the financial pages of newspapers. E. always less than the real interest rate.
D. the type of interest rate typically reported in the financial pages of newspapers.
Suppose that the nominal interest rate increases while the expected inflation rate rises. Given this information, we know with certainty that the real interest rate A. will fall, but only if the increase in the nominal rate is greater than the increase in expected inflation. B. will fall. C. will not change. D. will fall, but only if the increase in the nominal rate is smaller than the increase in expected inflation. E. none of the above
D. will fall, but only if the increase in the nominal rate is smaller than the increase in expected inflation.
Suppose bank A has assets of 100, liabilities of 80, and capital of 20. Its capital ratio is A. 10%. B. 11%. C. 25%. D. 20%.
D. 20%.
