Question 1

An increase in interest rates causes __________ the demand-for-loanable funds curve
A) a rightward shift in
B) a leftward shift in
C) a movement down along
D) a movement up along

Accepted Answer

An increase in interest rates causes a movement up along the demand-for-loanable funds curve, as higher interest rates make borrowing more expensive, reducing the quantity of loanable funds demanded.

Question 2

A __________ yield to maturity implies a __________ bond price.
A) lower; lower
B) higher; lower
C) higher; higher
D) None of the above.

Accepted Answer

A higher yield to maturity implies that the bond price is lower because bond prices and yields move in opposite directions. When the yield on a bond goes up, it means the market is demanding a higher return for holding the bond, which typically happens when the bond's price falls.

Question 3

__________ will cause a movement up along the demand for loanable funds curve.
A) A rise in interest rates
B) A decline in interest rates
C) An increase in business borrowing
D) A decrease in business borrowing

Accepted Answer

A rise in interest rates causes a movement up along the demand for loanable funds curve because it reflects a decrease in the quantity of loanable funds demanded at higher interest rates.

Question 4

Long-term bonds are __________ than short-term bonds, and long-term bonds often have a __________ yield than short-term bonds.
A) less risky; lower
B) more risky; lower
C) less risky; higher
D) more risky; higher

Accepted Answer

Long-term bonds are considered to be more risky because they are more sensitive to changes in interest rates and inflation rates over a long period of time. This means that their prices are more volatile, increasing the risk for investors. However, because of this increased risk, long-term bonds often offer a higher yield than short-term bonds to compensate investors for the additional risk they are taking on.

Question 5

An increase in the demand for loanable funds causes
A) the price of securities to rise.
B) interest rates to rise.
C) the supply of securities to shift to the left.
D) the demand for securities to shift to the right.

Accepted Answer

An increase in the demand for loanable funds leads to a higher demand for borrowing money, causing interest rates to rise since lenders will charge higher rates when the demand is high. Therefore, option B is correct. Option A is incorrect because an increase in the demand for loanable funds is not related to the price of securities. Option C is incorrect because an increase in the demand for loanable funds does not affect the supply of securities. Option D is incorrect because an increase in the demand for loanable funds does not directly change the demand for securities.

Question 6

A fall in interest rates will cause long-term bond prices to
A) fall less than short-term bond prices.
B) fall more than short-term bond prices.
C) rise less than short-term bond prices.
D) rise more than short-term bond prices.

Accepted Answer

When interest rates fall, bond prices rise because the fixed interest payments of existing bonds become more attractive compared to the new bonds issued at the lower rates. Long-term bonds are more sensitive to interest rate changes than short-term bonds, so their prices rise more in response to a decrease in rates.

Question 7

Interest rates are determined by the supply of and demand for
A) financial services.
B) loanable funds.
C) currency.
D) consols.

Accepted Answer

Interest rates are determined by the supply of and demand for loanable funds. When the demand for loanable funds is high, the interest rates increase and when there is a surplus of loanable funds, the interest rates decrease. The supply and demand for financial services may affect interest rates indirectly, but they are not the primary determinant. Currency and consols are not directly related to the determination of interest rates.

Question 8

The supply of loanable funds is equivalent to the
A) demand for loanable funds.
B) supply of securities.
C) demand for securities.
D) supply of bonds.

Accepted Answer

The answer of The supply of loanable funds is equivalent...

Question 9

Paul would like to buy a consol promising an interest rate of 8 percent and paying $90 annually. Paul should not pay more than $__________ for the console.
A) 90
B) 1,000
C) 1,125
D) 900

Accepted Answer

To calculate the maximum price Paul should pay for the console, we need to use the formula for present value of an annuity:

PV = Payment * [1 - (1 + r)^(-n)] / r

where PV is the present value, Payment is the annual payment, r is the interest rate, and n is the number of years.

Plugging in the given values, we get:

PV = 90 * [1 - (1 + 0.08)^(-1)] / 0.08
PV = 90 * (1 - 0.9259) / 0.08
PV = $1,125

Therefore, Paul should not pay more than $1,125 for the console, so the answer is (C).

Question 10

If individuals save __________, there is usually __________ pressure on interest rates.
A) less; upward
B) more; upward
C) less; downward
D) None of the above.

Accepted Answer

If individuals save less, there will be more demand for borrowing, which will put upward pressure on interest rates. On the other hand, if individuals save more, there will be less demand for borrowing, which will put downward pressure on interest rates.

Question 11

A consol has an annual coupon payment of $50. If the price of the consol rose from $400 to $500, the yield on the consol would
A) fall from 10 percent to 8 percent.
B) fall from 12.5 percent to 10 percent.
C) rise from 10 percent to 12.5 percent.
D) rise from 8 percent to 10 percent.

Accepted Answer

The yield on a consol is calculated as the coupon payment divided by the price of the consol. 
Initially, the yield is 50/400 = 0.125 (or 12.5%). 
If the price of the consol increases to $500, then the yield will be 50/500 = 0.1 (or 10%). 
Therefore, the yield will fall from 12.5% to 10%, which is option B.

Question 12

A consol has an annual coupon payment of $100 and a price of $800. The yield on this security is equal to __________ percent
A) 6
B) 10
C) 12.5
D) 14

Accepted Answer

To find the yield on the consol, we divide the annual coupon payment ($100) by the price ($800) and multiply by 100% to get:
Yield = ($100/$800) x 100% = 12.5%
Therefore, the correct answer is choice C.

Question 13

The ex ante real interest rate is __________, while the ex post real rate is __________.
A) the nominal interest rate minus expected inflation; the nominal interest rate minus actual inflation
B) the nominal interest rate minus actual inflation; the nominal interest rate minus expected inflation
C) the real interest rate plus expected inflation; the real interest rate plus actual inflation
D) the real interest rate plus actual inflation; the real interest rate plus expected inflation

Accepted Answer

The ex ante real interest rate is calculated by subtracting the expected inflation rate from the nominal interest rate, reflecting the anticipated real return on an investment. The ex post real interest rate, on the other hand, is determined by subtracting the actual inflation rate from the nominal interest rate, indicating the actual real return received after the fact.

Question 14

Which of the following would not cause an increase in the demand for loanable funds?
A) An increase in business borrowing
B) An increase in consumer borrowing
C) An increase in the public debt
D) A decrease in interest rates

Accepted Answer

A decrease in interest rates would not cause an increase in the demand for loanable funds; rather, it is a consequence of increased supply or decreased demand for loanable funds. Increases in business borrowing, consumer borrowing, and public debt all directly increase the demand for loanable funds.

Question 15

At the beginning of the year an investor pays $1,100 for a bond with a face value of $1,000. The bond pays a coupon payment of $60, and the investor sells it for $1,150 at the end of the year. The return is
A) 5.5 percent.
B) 6.0 percent.
C) 10.0 percent.
D) 10.5 percent.

Accepted Answer

The total return includes the coupon payment and the capital gain. The coupon payment is $60, and the capital gain is $1,150 - $1,100 = $50. So, the total return is $60 + $50 = $110. The return as a percentage of the initial investment is $110 / $1,100 = 10%.

Question 16

The demand for loanable funds is equivalent to the
A) supply of loanable funds.
B) supply of securities.
C) demand for securities.
D) supply of bonds.

Accepted Answer

The answer of The demand for loanable funds is equivalent...

Question 17

If the inflation rate is expected to be 2 percent and creditors will lend only if the real interest rate is 3 percent, the nominal interest rate will be
A) 1 percent.
B) 5 percent.
C) 7 percent.
D) 12 percent.

Accepted Answer

The nominal interest rate can be approximated by adding the expected inflation rate to the real interest rate. Therefore, 2% (inflation rate) + 3% (real interest rate) = 5% (nominal interest rate).

Question 18

A rise in interest rates will cause short-term bond prices to
A) fall less than long-term bond prices.
B) fall more than long-term bond prices.
C) rise more than long-term bond prices.
D) rise less than long-term bond prices.

Accepted Answer

Bond prices and interest rates have an inverse relationship. Long-term bonds are more sensitive to interest rate changes than short-term bonds, so when interest rates rise, long-term bond prices fall more significantly than short-term bond prices.

Question 19

The return on an asset with a purchase price of $940 and a selling price of $900 and coupon payments of $100 is
A) 6.4 percent.
B) 6.7 percent.
C) 14.9 percent.
D) 15.6 percent.

Accepted Answer

The formula for calculating return on an asset is:

Return = [(Coupon Payment + Selling Price) / Purchase Price] - 1

Substituting the given values in the formula, we get:

Return = [(100 + 900) / 940] - 1
Return = (1000/940) -1
Return = 0.0638 or 6.38%

Rounding it off to the nearest whole number, we get 6.4%.

Therefore, the answer is A) 6.4 percent.

Question 20

If the inflation rate is expected to be 5 percent and nominal interest rate is 9 percent, then the real interest rate will be
A) 14 percent.
B) 9 percent.
C) 5 percent.
D) 4 percent.

Accepted Answer

Real interest rate = nominal interest rate - inflation rate
= 9% - 5%
= 4%

Quiz 4: Interest Rate Measurement and Behavior

An increase in interest rates causes __________ the demand-for-loanable funds curve

A yield to maturity implies a bond price.

__________ will cause a movement up along the demand for loanable funds curve.

Long-term bonds are than short-term bonds, and long-term bonds often have a yield than short-term bonds.

An increase in the demand for loanable funds causes

A fall in interest rates will cause long-term bond prices to

Interest rates are determined by the supply of and demand for

The supply of loanable funds is equivalent to the

Paul would like to buy a consol promising an interest rate of 8 percent and paying $90 annually. Paul should not pay more than $__________ for the console.

If individuals save , there is usually pressure on interest rates.

A consol has an annual coupon payment of $50. If the price of the consol rose from $400 to $500, the yield on the consol would

A consol has an annual coupon payment of $100 and a price of $800. The yield on this security is equal to __________ percent

The ex ante real interest rate is , while the ex post real rate is .

Which of the following would not cause an increase in the demand for loanable funds?

At the beginning of the year an investor pays $1,100 for a bond with a face value of $1,000. The bond pays a coupon payment of $60, and the investor sells it for $1,150 at the end of the year. The return is

The demand for loanable funds is equivalent to the

If the inflation rate is expected to be 2 percent and creditors will lend only if the real interest rate is 3 percent, the nominal interest rate will be

A rise in interest rates will cause short-term bond prices to

The return on an asset with a purchase price of $940 and a selling price of $900 and coupon payments of $100 is

If the inflation rate is expected to be 5 percent and nominal interest rate is 9 percent, then the real interest rate will be