Unit 4 Macroeconomics

If the expected inflation rate is 6%, the nominal interest rate is 2%, and the actual inflation rate is 4%, what is the actual real interest rate?

-2%

Which of the following most undermines the ability of a nation's currency to store value?

A decrease in the purchasing power of the currency

Which of the following will lower the prices of a country's outstanding government bonds?

An outflow of financial capital to other countries

Which of the following is true for bonds but not for stocks?

Bonds are interest-bearing assets.

The monetary base includes which of the following?

Currency in circulation

Which of the following is true of the opportunity cost of holding cash?

It increases as the interest rate rises.

On the island of Mabera, the local money is called "favoli." The price of every good in Mabera is expressed as the number of favolis needed to buy the good. The use of favolis to express the price of goods describes which function of money?

Unit of account

The real interest rate earned is the

cost of borrowing adjusted for the rate of change in the price level

Of the following, the most liquid asset is

currency

All of the following are components of the money supply in the United States EXCEPT

gold bullion

In the long run, a fully anticipated increase in the inflation rate will

increase the nominal interest rate

The narrowest definition of money, M1, includes which of the following

savings accounts

Assume that in a banking system in which banks hold no excess reserves, the public holds part of its money in cash and the rest in checking accounts. If the required reserve ratio is 10 percent, actual reserves are $10 million, and currency in circulation is equal to $20 million, M1 will be equal to

$120 million

Suppose that the real interest rate is equal to seven percent and the expected inflation rate is currently three percent. If an oil crisis in the Middle East increases the expected inflation rate to four percent, the new nominal interest rate is equal to

11%

Assume the nominal interest rate on a 15-year fixed-rate mortgage loan is 5 percent. If the expected inflation rate is 2 percent, the expected real interest rate is

3%

Assume that the nominal interest rate is 10 percent. If the expected inflation rate is 5 percent, the real interest rate is

5%

In the country of Agronomia, banks charge 10 percent interest on all loans. If the general price level has been increasing at the rate of 4 percent per year, the real rate of interest in Agronomia is

6%

The annual inflation rate is expected to be 5 percent over the next 3 years. Juan plans to take out a 3-year loan to purchase an automobile. If Juan decides not to take out the loan if the real interest rate exceeds 3 percent, the highest nominal interest rate he is willing to pay is

8 percent

Which of the following is NOT a function of fiat money?

A source of intrinsic value

Assume that a country's government increases borrowing. What will most likely happen to the prices of previously issued bonds and the price level in the short run?

Bond Prices: Decrease Price Level: Increase

Assume a country's banking system has limited reserves. In the short run, which of the following would occur to the price of previously issued bonds and interest rates if a central bank bought bonds through open-market operations?

Bond Prices: Increase Interest Rates: Decrease

Which of the following is considered the most liquid asset?

Currency

Which of the following is true about inflation and interest rates?

If there is no actual or expected inflation, the nominal and real interest rates are equal.

Which of the following is true of the quantity of money demanded?

It falls when interest rates rise, because the opportunity cost of holding money increases.

Which of the following is true about the expected real interest rate?

It is negative if the expected inflation rate exceeds the nominal interest rate.

Which of the following best describes the nominal interest rate on a mortgage loan that a bank offers to a customer?

It is the interest rate charged by the bank.

If both the nominal interest rate and the expected inflation rate increase, what will happen to the real interest rate?

It will decrease if the expected inflation rate increases by more than the nominal interest rate.

If the inflation rate increases, what will happen to the real interest rate on existing loans with fixed nominal interest rates?

It will decrease.

Fred Jones withdraws $1,000 in cash from his savings account. What immediate effect does this transaction have on the monetary aggregate measures of M1 and M2 ?

M1 will not change; M2 will not change

An increase in inflationary expectations will most likely affect nominal interest rates and bond prices in which of the following ways in the short run?

Nominal Interest Rate: Increase Bond Prices: Decrease

Assume that the economy is in equilibrium. If aggregate demand increases, nominal interest rates and bond prices will most likely change in which of the following ways?

Nominal Interest Rates: Increase Bond Prices: Decrease

Nominal interest rates and prices of previously issued bonds will be affected in which of the following ways when money demand exceeds money supply?

Nominal interest rates will increase, and bond prices will decrease.

Which of the following would be true if the actual rate of inflation were less than the expected rate of inflation?

People who borrowed funds at the nominal interest rate during this time period would lose.

Sam pays monthly installments on a five-year fixed interest rate auto loan. If the expected inflation rate increases, which of the following will happen?

Sam will pay a lower real interest rate.

Which of the following describes a major difference between stocks and bonds?

Stocks represent ownership in a corporation, and bonds represent a loan to a corporation.

When Stephanie took out a one-year fixed-rate loan, she expected to pay a real interest rate of 3 percent. At the end of the year, the real interest rate had fallen to 2 percent. Which of the following could have caused the decrease in the real interest rate?

The actual inflation rate was greater than the expected inflation rate.

Assume that the inflation rate is 10 percent and a bank account effectively yields a real rate of interest of negative 5 percent per year. Would a person be better off keeping money in the bank account or in cash?

The bank account, because the loss is less than it is when holding cash.

When purchasing her house, Ms. Jones took out a 15-year mortgage loan from a local bank at a fixed interest rate of 7 percent. The rate of expected inflation at the time was 3 percent. If the actual rate of inflation was 4.5 percent, which of the following is true?

The bank lost because the real rate of interest decreased by 1.5%.

Which of the following statements about inflation is true?

The expected inflation rate is the difference between nominal and real interest rates.

Which of the following measures the opportunity cost of holding currency?

The forgone interest on alternative assets

Last year both a borrower and a lender expected an inflation rate of 3 percent when they signed a long-term loan agreement with fixed nominal interest rates of 5 percent. If the actual inflation rate were lower than expected, then which of the following would be true?

The lender would benefit.

What is the opportunity cost of keeping cash at home?

The lost income from not investing the money in an interest-bearing financial asset

If the interest rate on loans before adjusting for inflation is 9%, and the expected inflation rate is 4%, then which of the following must be true?

The nominal interest rate is 9%.

Which of the following will happen when interest rates increase in an economy?

The opportunity cost of holding money will increase.

What is the relationship between the price of previously issued bonds and the prevailing market interest rate?

The price of previously issued bonds is inversely related to the prevailing market interest rate.

A barter economy is different from a money economy in that a barter economy

involves higher costs for each transaction

The transaction demand for money is very closely associated with money's use as a

medium of exchange

Pat deposits a portion of her wages into a personal savings account every week. The saved money can be considered to be primarily a

store of value

The real value of the United States dollar is determined by

the goods and services it will buy