Econ Ch. 9

Falling interest rates cause the market value of previously issued bonds to?

Rise.

The Exchange Rate is?

The price of one currency in terms of another currency.

Your grandmother gives you a $100 savings bond that will mature in 15 years. The bank tells you that they will buy it from you today at a price of $24. If interest rates rise in the near future, the value of your bond? (DID you Read the Box)?

Will fall and it will be worth less than $24.

Within the framework of the AS/AD model, which of the following is a true statement regarding short-run aggregate supply?

an increase in prices temporarily improves profit margins because important components of costs are fixed in the short run

The inflationary premium is that portion of the intros rate that reflects

the expected annual rate of decline in the purchasing power of money while a loan is outstanding

when loanable funds and foreign exchange markets are in equilibrium

the leakages from the circular flow char will equal the injections into it

The macroeconomy is said to be in long run equilibrium only if

the resource, lovable funds, foreign exchange, and goods and services markets are all in equilibrium

Facial policy is

the use of government taxation and expenditures to achieve macroeconomic goals

If expected inflation is constant and the nominal interest rate increased 3 percentage points, the real interest rate would?

Increase 3 percentage points.

Other things constant, an increase in the expected inflation rate will?

Increase money (nominal) interest rates.

If a person earns an 8 percent nominal rate of interest on his savings account in a year when inflation is 9 percent, the person's real rate of interest is?

-1 percent.

Suppose you purchase a $5,000 bond that pays 7 percent interest annually and matures in five years. If you expect that the inflation rate during the next five years will be 2 percent annually, what real rate of return do you expect to earn?

5 percent.

People anticipate inflation will be 3 percent during the next several years. If this is true, when the real interest rate is 4 percent, the money interest rate will be?

7 percent.

Suppose people anticipate INFLATION will be 5 percent during the next several years. IF the real rate of interest is 4 percent, the money rate of interest must be?

9 percent.

Which of the following is TRUE? (Do you have your Drawing)? Savings, taxes, and imports are leakages from the circular flow of income. Investment, government purchases, and exports are injections into the circular flow of income. When the loanable funds and foreign exchange markets are in equilibrium, the injections into the circular flow of income will equal the leakages from it. All of the above are true.

All of the above are true.

The real interest rate is? The premium that borrowers must pay in order to acquire more purchasing power. The reward lenders receive in exchange for their willingness to delay consumption into the future. Equal to the money interest rate minus the inflationary premium. All of the above.

All of the above.

If the dollar price of the English pound goes from $1.75 to $1.50, the dollar has?

Appreciated, and Americans will find English goods cheaper.

If the expected rate of inflation is zero, the real interest rate must?

Be equal to the money (nominal) interest rate.

Which of the following would generate a supply of euros in exchange for dollars?

European demand for U.S. government bonds.

The size of the inflationary premium will vary directly with the?

Expected inflation rate.

Mary Green takes a summer course in London, England. She doesn't buy British pounds at the U.S. airport, where the rate is 1 pound = $1.60. Upon arrival in London, she finds that she can buy pounds for $1.65 each. Which of the following is TRUE?

Green would have been better off if she had bought pounds in the United States where pounds were less expensive.

A positive nominal interest rate indicates?

How fast the number of dollars in your savings account is rising over time.

A positive real interest rate indicates?

How fast the purchasing power of your savings account is rising over time.

When the foreign exchange market is in equilibrium, which of the following will be TRUE?

Imports -exports =net capital inflow

he difference between the money rate of interest and the real rate of interest is often called the?

Inflationary premium.

Of the following, who would most likely be hurt by an unanticipated increase in the rate of inflation?

Lenders who have made long-term loans at fixed interest rates

If a nation's currency depreciates, this will tend to?

Make foreign goods more expensive for the nation's citizens.

Which of the following is the most accurate statement about real and nominal interest rates?

Real interest rates can be either positive or negative, but nominal interest rates must be positive.

Tina agrees to lend Steve $1,000 for one year at a nominal rate of interest of 5 percent. At the end of the year prices have actually risen by 7 percent. Tina earned a real rate of return of?

Negative 2%

If net exports are negative, then

Net capital outflow is negative, so American assets bought by foreigners are greater than foreign assets bought by Americans.

If net exports are positive then?

Net capital outflow is positive, so foreign assets bought by Americans are greater than American assets bought by foreigners.

In the Loanable Funds market, the true burden of borrowers and the true yield to lenders is the?

Real (inflation adjusted) interest rate.

Suppose business decision makers become more optimistic about future economic conditions and desire additional funds to expand their plant capacity. What is the likely effect on the loanable funds market?

The demand for loanable funds will increase, and the interest rate will rise.

If the U.S. demand for British pounds increases,

The dollar price of a British pound will increase.

The money interest rate may be a misleading indicator of real borrowing costs when?

The inflation rate is high.

The Real Rate of Interest is?

The money rate of interest adjusted for inflation.

A decrease in the dollar price of foreign currency would cause?

The nation's imports to increase and exports to decline.

Arnold puts money into an account. One year later he sees that he has 5 percent more dollars and that his money will buy 6 percent more goods.

The nominal interest rate was 5 percent and the inflation rate was -1 percent.

Which of the following will be True when the foreign exchange market is in equilibrium and exports exceed imports?

There will be a net outflow of capital.

Within the aggregate demand/aggregate supply framework (The Graph), the quantity on the horizontal axis in the aggregate goods and services market represents the?

Total real output (real GDP) of the economy.

Imagine that there are only two nations in the world, the United States and Mexico. If Americans buy more goods made in Mexico, other things constant, the

U.S. demand curve for Mexican peso will shift rightward.

A decrease in the dollar price of the English pound will make,

U.S. exports to England decrease.

Which of the following will most likely result from a decline in the dollar price of a foreign currency?

U.S. exports will become more expensive for foreigners, and therefore, they will decrease.

Americans needing Foreign currencies get those currencies from a bank. The ultimate source of these currencies is?

U.S. sales to foreign countries.

In the short run, if prices were above equilibrium

excess aggregate supply of goods and services would place downward pressure on prices