Chapter 12 Questions (4 questions on exam)

The neoclassical theory of investment:

emphasizes the role of real interest rates and taxes.

Financial intermediaries are:

firms that receive funds from savers and channel them to investors.

Financial intermediaries reduce risk by:

gaining expertise in evaluating and monitoring investments. investing in a large number of projects with independent returns.

If the nominal interest rate is 7%, the expected real interest rate is 3%, and the inflation rate for past year was 3%, then the expected inflation rate is ________ the past inflation rate.

greater than

The interest rate on a loan will be______as its risk______and its maturity ______.

higher, increases, lengthens

8. Compared to a30-year U.S. Treasury, the interest rate on a 30-year fixed mortgage will be ______ because it is a loan with _______.

higher, more risk

Firms are likely to________investment spending when they believe

increase, increase decrease, decrease

Expected real interest rates are the:

interest rates quoted in the market minus the expected inflation rate.

The Q-theory of investment:

links investment spending to stock prices.

Insurance companies can reduce risk by accepting premiums from:

many people to insure against independent events.

The model in which a down turn in real GDP leads to a sharp fall in investment, which further reduces GDP

multiplier-accelerator

The interest rates quoted in the market are:

nominal interest rates.

Which of the following equations is correct?

real interest rate = nominal interest rate - inflation.

Financial intermediaries are institutions that facilitate the movement of funds from savers to investors because they:

reduce the costs of negotiating such transactions. monitor investments. reduce risks. provide liquidity.

Financial intermediaries:

reduce the risks associated with investment.

In the United States, runs on banks are prevented because:

the government guarantees banks accounts for up to $100,000.

Suppose you have $200 to invest at a nominal interest rate of 8%. If the inflation rate is 3%, then the real return on your investment is:

10$

Suppose you have $300 and the inflation rate is 6%. In order to earn a real return of $18 on your investment, the nominal interest rate must be:

12%

If the nominal interest rate is 8% and the inflation rate is 5%, then the real rate of interest is:

3%.