Econ 202 chp 12

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; 8-3=5%, .05*200=$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%; 18/300=6, 6+6=12

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

3%; 8-5=3

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

All of the above; reduce the costs of negotiating such transactions, monitor investments, reduce risks, provide liquidity.

Firms are likely to _____ investment spending when they believe that growth in real GDP will ______.

Both A and D; increase, increase. decrease, decrease.

As the real interest rate _____, the real investment spending ____.

Both c and d; increases, decreases. decreases, increases.

Which of the following equations is correct?

Real interest rates= nominal interest rate-inflation

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

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

greater than; 7-3=4%

Compared to a 30 year US Treasury, the interest rate on a 30 year fixed mortgage will be ______ because it is a loan with _____.

higher, more risk

The inerest rate on a loan will be ____ as its risk _____ and its maturity ______.

higher; increases; lengthens

Expected real interest rates are the:

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

Financial intermediaries reduce risk by:

investing in a large number of projects with independent returns

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 downturn in real GDP leads to a sharp fall in investment, which further reduces GDP through the multiplier, is known as the _____ model.

multiplier-accelerator

The interest rates quoted in the market are:

nominal interest rates

Financial intermediaries:

reduce the risks associated with investment

In the US, runs on banks are prevents because:

the gov't guarantees banks accounts for up to $100,000