Chapter 13, Assignment 6

D

If a 3-month Treasury bill pays 5.5% and the change in the consumer price index (CPI) is 4.7%, what is the real interest rate (the true return to lending)? A) 4.7% B) 5.5% C) 10.2% D) 0.8%

D

If the economy is experiencing deflation, A) high nominal interest rates inflict serious losses on both household and business borrowers. B) the nominal interest rate will be higher than the real interest rate. C) the nominal interest rate will be equal to the real interest rate. D) the nominal interest rate will be lower than the real interest rate.

B

If the inflation rate is 6 percent and the nominal interest rate is 4 percent, then the real interest rate is A) 2 percent, which is the inflation rate minus the nominal interest rate. B) -2 percent, which is the nominal interest rate minus the inflation rate. C) 10 percent, which is the sum of the nominal interest rate and the inflation rate. D) 1.5 percent, which is the ratio of the nominal interest rate to the inflation rate.

-0.33

In February 2020, the nominal interest rate on the one-year Treasury bill was 1.37 percent. From February 2020 to February 2021, the consumer price index rose from 258.8 to 263.2. If you bought the one-year Treasury bill in February 2020, the interest rate you earned over the following 12-month period was __________%.

5.3

Suppose that the only good you purchase is premium bottled water and that at the beginning of the year, the price of a bottle is $2.00. Suppose you lend $1,000 for one year at an interest rate of 13.8 percent. At the end of the year, the price of premium bottled water has risen to $2.17. Calculate the real interest rate in the loan. _________%.

D

The following appeared in a newspaper article: "Inflation in the Lehigh Valley during the first quarter of [the year] was less than half the national rate...So, unlike much of the nation, the fear here is deflation-when prices sink so low that the CPI drops below zero." Do you agree with the reporter's definition of deflation? A) Yes. When prices fall too low, the CPI is negative. B) Yes. Deflation is caused by a negative CPI. C) No. Deflation occurs when the nominal interest rate is greater than the real interest rate. D) No. Deflation is defined as a negative inflation rate.

4.8

Suppose an economy has an inflation rate of 3.1% and a bank makes a loan with an interest rate of 7.9%. In this case, the real interest rate is _________%.

C

The real interest rate A) is the interest rate that is quoted on a financial debt and a firm's assets. B) is equal to the inflation rate minus the nominal interest rate. C) is equal to the nominal interest rate minus the inflation rate. D) is the interest rate that adjusts GDP for changes in prices.

D

The real interest rate equals A) the inflation rate minus the nominal interest rate. B) the nominal interest rate divided by the CPI for a given year. C) the nominal interest rate plus the inflation rate. D) the nominal interest rate minus the inflation rate.

B

If inflation is expected to increase, A) the nominal interest rate will remain the same. B) the nominal interest rate will increase. C) the real interest rate will increase. D) the nominal interest rate will decrease.

D

Describing the situation in England in 1920, the historian Robert Skidelsky wrote the following: "Who would not borrow at 4 percent a year, with prices going up 4 percent a month?" What was the real interest rate paid by borrowers in this situation? A) 8% B) -44% C) 0% D) -56%

D

For a given positive inflation rate, A) the nominal interest rate can be lower than the real interest rate, and the real interest rate may be positive or negative. B) the real interest rate is always higher than the nominal interest rate, and the real interest rate may be positive or negative. C) the nominal interest rate can be lower than the real interest rate, but the nominal interest rate cannot be negative. D) the nominal interest rate is always higher than the real interest rate, and the real interest rate may be positive or negative.

C

The chapter explains that it is impossible to know whether a particular nominal interest rate is "high" or "low" because A) it all depends in the Fed's monetary policy rule. B) it all depends on the federal funds rate. C) it all depends on the inflation rate. D) it is controlled by the Fed's open market operations.

C

The difference between the nominal interest rate and the real interest rate is A) the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate divided by the inflation rate. B) the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate plus the inflation rate. C) the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate minus the inflation rate. D) the real interest rate is the stated interest rate whereas the nominal interest rate is the real interest rate minus the inflation rate.