CH. 9

In the foreign exchange market, the price of one nation's currency in terms of the currency of another nation is known as the a. exchange rate. b. inflation rate. c. interest rate. d. wage rate.

a. exchange rate.

Other things constant, an increase in the expected inflation rate will a. increase money (nominal) interest rates. b. decrease the inflationary premium. c. increase the supply of loanable funds. d. decrease the money interest rate.

a. increase money (nominal) interest rates.

If the expected rate of inflation is zero, the real interest rate must a. be greater than the money (nominal) interest rate. b. be equal to the money (nominal) interest rate. c. be less than the money (nominal) interest rate. d. also equal zero.

b. be equal to the money (nominal) interest rate.

The real rate of interest equals the a. inflationary premium. b. money rate of interest minus the expected inflation rate. c. money rate of interest plus the expected inflation rate. d. nominal rate of interest.

b. money rate of interest minus the expected inflation rate.

Gladys agrees to lend Kay $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. Gladys earned a real rate of return of a. 5%. b. 7%. c. Negative 2%. d. 2%.

c. Negative 2%.

An increase in the real interest rate will a. decrease the inflationary premium. b. decrease the price of current consumption relative to future consumption. c. increase the price of current consumption relative to future consumption. d. increase the inflationary premium.

c. increase the price of current consumption relative to future consumption.

When equilibrium is present, if market conditions do not change, a. the current price will tend to persist in the future, but the current quantity will tend to rise. b. the current price will tend to rise in the future, and the current quantity will tend to fall. c. the current price and quantity will tend to persist in the future. d. the current price will tend to fall in the future, and the current quantity will tend to rise.

c. the current price and quantity will tend to persist in the future.

If expected inflation is constant and the nominal interest rate increased 3 percentage points, the real interest rate would a. increase, but by less than 3 percentage points. b. decrease by 3 percentage points. c. decrease, but by less than 3 percentage points. d. increase 3 percentage points.

d. increase 3 percentage points.

Which of the following basic economic concepts most clearly provides the foundation for the long-run aggregate supply curve? a. the law of demand b. the law of comparative advantage c. the law of diminishing marginal utility d. the production possibilities curve

d. the production possibilities curve