Question 1

If the expected rate of inflation is zero, the real interest rate must
A)also equal zero.
B)be greater than the money (nominal) interest rate.
C)be equal to the money (nominal) interest rate.
D)be less than the money (nominal) interest rate.

Accepted Answer

The real interest rate is calculated by subtracting the expected rate of inflation from the money (nominal) interest rate. Therefore, if the expected rate of inflation is zero, the real interest rate will simply be equal to the money (nominal) interest rate.

Question 2

An increase in the real interest rate will
A)increase the inflationary premium.
B)decrease the inflationary premium.
C)increase the price of current consumption relative to future consumption.
D)decrease the price of current consumption relative to future consumption.

Accepted Answer

When the real interest rate increases, the cost of borrowing increases, which increases the price of current consumption relative to future consumption. This is because the higher interest rate makes it more expensive to borrow now, so people will be more incentivized to save their money and consume in the future when they have enough saved up. This increase in cost of current consumption relative to future consumption is reflected in the form of a higher real interest rate.

Question 3

The difference between the money interest rate and the real interest rate is the
A)prime interest rate.
B)nominal interest rate.
C)exchange rate.
D)inflationary premium.

Accepted Answer

The answer of The difference between the money interest rate...

Question 4

The difference between the money rate of interest and the real rate of interest is often called the
A)real balance effect.
B)prime interest rate.
C)inflationary premium.
D)discount rate.

Accepted Answer

The difference between the money rate of interest and the real rate of interest is called the inflationary premium. The money rate of interest is the nominal interest rate that is offered by banks and lenders, whereas the real rate of interest is the nominal rate adjusted for inflation. Therefore, the inflationary premium measures the effect of inflation on the nominal interest rate, which can have a significant impact on borrowers and lenders.

Question 5

Suppose that 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?
A)2 percent
B)5 percent
C)7 percent
D)9 percent

Accepted Answer

To calculate the real rate of return, we need to subtract the expected inflation rate from the bond's interest rate. Real rate of return = Nominal rate of return - Inflation rate. In this case, the nominal rate of return is 7 percent and the expected inflation rate over the next five years is 2 percent annually. Therefore, the real rate of return would be 5 percent (7% - 2% = 5%).

Question 6

Which of the following events would cause the interest rate to rise?
A)a decrease in the demand for loanable funds
B)an increase in the demand for loanable funds
C)an increase in the supply for loanable funds
D)a decrease in aggregate demand

Accepted Answer

An increase in the demand for loanable funds would cause interest rates to rise because borrowers would compete for a limited supply of funds, driving up the price (i.e., interest rate) of borrowing. A decrease in the demand for loanable funds would have the opposite effect, causing interest rates to fall. An increase in the supply of loanable funds would also cause interest rates to fall, as lenders would compete to lend out their funds. A decrease in aggregate demand would not directly impact interest rates.

Question 7

An increase in the real interest rate will
A)lead to an increase in the expected inflation rate.
B)increase the real cost of purchasing goods and services in the current period relative to future periods.
C)encourage borrowers to demand a larger quantity of funds.
D)reduce the quantity of funds supplied to the loanable funds market.

Accepted Answer

An increase in the real interest rate will increase the real cost of purchasing goods and services in the current period relative to future periods. This means that individuals are encouraged to save, which reduces the quantity of funds supplied to the loanable funds market. It does not lead to an increase in the expected inflation rate or encourage borrowers to demand a larger quantity of funds.

Question 8

A firm's level of investment is tied to the interest rate
A)only when the firm has to borrow funds to buy capital
B)only when the firm has to borrow funds to buy stocks
C)only when the firm already has the funds and could lend them
D)because the interest rate represents the opportunity cost of investing in capital
E)because investments are always made with borrowed funds

Accepted Answer

The interest rate represents the opportunity cost of investing in capital, meaning that firms will only invest in capital projects if the expected return is higher than the interest rate they could earn by investing those funds elsewhere. Therefore, interest rates will have an impact on a firm's level of investment regardless of whether they borrow funds to purchase capital or already have the funds available. Choices A and E are incorrect because they assume that all investments are made with borrowed funds, which is not always the case. Choices B and C are not relevant to the relationship between interest rates and investment levels.

Question 9

If people suddenly anticipate that inflation will rise during the next year, which of the following is most likely?
A)Nominal interest rates will rise.
B)Nominal interest rates will decline.
C)The demand for goods and services will decline.
D)Both the real and nominal interest rates will decline.

Accepted Answer

If people expect inflation to rise, lenders will require higher nominal interest rates to compensate for the expected decline in the value of the money they'll be repaid with. As a result, nominal interest rates will rise.

Question 10

The real rate of interest equals the
A)money rate of interest minus the expected inflation rate.
B)money rate of interest plus the expected inflation rate.
C)inflationary premium.
D)nominal rate of interest.

Accepted Answer

The real rate of interest adjusts for inflation by subtracting the expected inflation rate from the money rate of interest. This gives the true increase in purchasing power that the interest rate provides.

Question 11

The money rate of interest will be less than the real rate of interest when decision makers anticipate
A)stable prices in the future.
B)falling prices in the future.
C)inflation in the future.
D)that the money rate of interest will decline.

Accepted Answer

When decision makers anticipate falling prices in the future, they may prefer to hold onto their money rather than invest it, as they expect goods and services to become cheaper over time. This decreases demand for loans and lowers the money rate of interest. However, the real rate of interest may remain higher due to the opportunity cost of not investing in alternative assets.

Question 12

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
A)-1 percent.
B)1 percent.
C)8 percent.
D)9 percent.

Accepted Answer

The real rate of interest is calculated by subtracting the inflation rate from the nominal interest rate. Here, 8% - 9% = -1%.

Question 13

Other things constant, an increase in the expected inflation rate will
A)decrease the inflationary premium.
B)increase money (nominal) interest rates.
C)increase the supply of loanable funds.
D)decrease the money interest rate.

Accepted Answer

An increase in the expected inflation rate will increase money (nominal) interest rates as lenders demand compensation for the expected loss in purchasing power caused by inflation. This is commonly referred to as the inflationary premium. Option A is incorrect as an increase in expected inflation will increase the inflationary premium, not decrease it. Option C is also incorrect as an increase in expected inflation does not necessarily affect the supply of loanable funds. Option D is incorrect as the expected increase in inflation would lead to an increase in money interest rates, not a decrease.

Question 14

The real interest rate is
A)the premium that borrowers must pay in order to acquire more purchasing power.
B)the reward lenders receive in exchange for their willingness to delay consumption into the future.
C)equal to the money interest rate minus the inflationary premium.
D)all of the above.

Accepted Answer

The answer of The real interest rate is
A)the premium that...

Question 15

Which of the following equations is accurate?
A)money interest rate = real interest rate - inflationary premium
B)real interest rate = money interest rate + inflationary premium
C)real interest rate = money interest rate - inflationary premium
D)real interest rate = money interest rate

Accepted Answer

The real interest rate is calculated by subtracting the inflationary premium from the money interest rate.

Question 16

Suppose people expect inflation to be 3 percent during the next several years. When the real interest rate is 5 percent, the money, or nominal interest rate, will be
A)1 percent.
B)4 percent.
C)7 percent.
D)8 percent.

Accepted Answer

The answer of Suppose people expect inflation to be 3...

Question 17

Marquis borrowed $1,000 from Ayana for a year and agreed to repay her $1,050 at the end of the year. If the inflation rate was 3 percent, what is the real rate of interest Ayana received?
A)10 percent
B)5 percent
C)3 percent
D)2 percent
E)-2 percent

Accepted Answer

The nominal interest rate is 5% (since $1,050 - $1,000 = $50, which is 5% of $1,000). The real interest rate is calculated by subtracting the inflation rate from the nominal rate: 5% - 3% = 2%.

Question 18

The real rate of interest is
A)interest paid by commercial banks.
B)interest paid by the Fed.
C)equal to the money rate of interest plus the inflationary premium.
D)the money rate of interest adjusted for inflation.

Accepted Answer

The real rate of interest is the money rate of interest adjusted for inflation, which gives the true return on an investment or loan after accounting for the impact of inflation. A and B are incorrect as they refer to specific interest paid by commercial banks or the Fed, respectively. C is partially correct as it mentions the inflationary premium, but only D accurately defines the real rate of interest.

Question 19

Darius lent Alejandro $1,000 for one year with the understanding that Alejandro would repay $1,070. If the actual inflation rate was 7 percent, what was the real rate of interest Darius received?
A)14 percent
B)7 percent
C)4 percent
D)0 percent
E)-7 percent

Accepted Answer

The nominal interest rate was 7 percent (since $1,070 is $1,000 plus 7%). However, with an inflation rate of 7 percent, the real rate of interest is 0 percent because the purchasing power of the money returned is the same as the money lent.

Question 20

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
A)1 percent.
B)3 percent.
C)4 percent.
D)7 percent.

Accepted Answer

The money interest rate is equal to the real interest rate plus the anticipated inflation rate. Therefore, the money interest rate would be 7 percent (4 percent real interest rate + 3 percent anticipated inflation rate).

Quiz 9: An Introduction to Basic Macroeconomic Markets

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

An increase in the real interest rate will

The difference between the money interest rate and the real interest rate is the

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

Suppose that 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?

Which of the following events would cause the interest rate to rise?

An increase in the real interest rate will

A firm's level of investment is tied to the interest rate

If people suddenly anticipate that inflation will rise during the next year, which of the following is most likely?

The real rate of interest equals the

The money rate of interest will be less than the real rate of interest when decision makers anticipate

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

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

The real interest rate is

Which of the following equations is accurate?

Suppose people expect inflation to be 3 percent during the next several years. When the real interest rate is 5 percent, the money, or nominal interest rate, will be

Marquis borrowed $1,000 from Ayana for a year and agreed to repay her $1,050 at the end of the year. If the inflation rate was 3 percent, what is the real rate of interest Ayana received?

The real rate of interest is

Darius lent Alejandro $1,000 for one year with the understanding that Alejandro would repay $1,070. If the actual inflation rate was 7 percent, what was the real rate of interest Darius received?

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