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