Question 1

Approximately, the real interest rate ________ the inflation rate ________ the nominal interest rate.

Accepted Answer

The answer of Approximately, the real interest rate ________ the...

Question 2

If the present value of $220 one year from now is $200, then the interest rate is

Accepted Answer

The interest rate can be found using the formula for present value: $PV = \frac{FV}{(1 + r)^n}$, where PV is the present value, FV is the future value, r is the interest rate, and n is the number of periods. Plugging in the given values: $200 = \frac{$220}{(1 + r)^1}$. Solving for r gives r = 0.10 or 10%.

Question 3

The present value of $200 two years from now when the interest rate is 7 percent is

Accepted Answer

The present value (PV) is calculated using the formula: PV = FV / (1 + r)^n, where FV is the future value, r is the interest rate, and n is the number of periods. Here, PV = $200 / (1 + 0.07)^2 = $175.

Question 4

When the inflation rate is positive, the

Accepted Answer

The real interest rate is adjusted for inflation and is typically less than the nominal interest rate when the inflation rate is positive.

Question 5

If you lend a dollar for a year and at the end of the year the price level has risen by 10 percent

Accepted Answer

To maintain the purchasing power of your loan over a year during which the price level rises by 10 percent, you must earn a nominal interest rate of at least 10 percent. This compensates for the inflation and keeps the real value of your money constant.

Question 6

A financial decision should be pursued when

Accepted Answer

A financial decision should be pursued when the net present value (NPV) is positive, as this indicates that the investment is expected to generate more value than its cost, leading to a profitable outcome.

Question 7

People know that the inflation rate will decrease from 7 percent to 3 percent. As a result

Accepted Answer

The nominal interest rate typically reflects the real interest rate plus the expected inflation rate. If people expect inflation to decrease from 7 percent to 3 percent, the nominal interest rate would likely decrease by that difference (4 percentage points) to reflect the lower inflation expectations, assuming the real interest rate remains constant.

Question 8

Other things remaining the same, if the interest rate falls,

Accepted Answer

A decrease in the interest rate reduces the discount rate applied in the Net Present Value (NPV) calculation, which increases the present value of future cash flows, thus potentially increasing the NPV of a project.

Question 9

Suppose that you took out a $1,000 loan in January and had to pay $75 in annual interest. During the year, inflation was 6 percent. Which of the following statements is CORRECT?

Accepted Answer

The nominal interest rate is calculated as the interest paid ($75) divided by the loan amount ($1,000), which equals 7.5%. The real interest rate adjusts the nominal rate for inflation, calculated as the nominal rate (7.5%) minus the inflation rate (6%), resulting in a real interest rate of 1.5%.

Question 10

When the inflation rate is zero, the

Accepted Answer

When the inflation rate is zero, the real interest rate equals the nominal interest rate because inflation does not erode the purchasing power of the money.

Question 11

If a bank's net worth is negative, then the bank definitely is

Accepted Answer

When a bank's net worth is negative, it means its liabilities exceed its assets, which is a definition of insolvency. Insolvency indicates that the bank cannot meet its long-term financial obligations.

Question 12

When the inflation rate is negative, the

Accepted Answer

When the inflation rate is negative, it means there is deflation. In such a scenario, the real interest rate (which adjusts the nominal rate for inflation) is greater than the nominal interest rate because the purchasing power of money increases.

Question 13

Which of the following is TRUE regarding the real interest rate?
I. The real interest rate is the opportunity cost of borrowed funds.
II. The real interest rate equals the nominal interest rate adjusted for inflation.

Accepted Answer

Both statements are true. The real interest rate does represent the opportunity cost of borrowing funds, as it reflects the true cost of borrowing money once inflation is taken into account. Additionally, the real interest rate is indeed calculated by adjusting the nominal interest rate for the effects of inflation.

Question 14

People expect an inflation rate of 5 percent and the real interest rate is positive. Consequently the nominal interest rate will be

Accepted Answer

The nominal interest rate is determined by the Fisher equation, which states that the nominal interest rate is equal to the real interest rate plus the expected inflation rate. Since the real interest rate is positive and the expected inflation rate is 5 percent, the nominal interest rate must be more than 5 percent.

Question 15

People know that the inflation rate will increase from 3 percent to 5 percent. As a result

Accepted Answer

When people expect inflation to increase, lenders demand higher nominal interest rates to compensate for the decreased purchasing power of money in the future, leading to an increase in the nominal interest rate.

Question 16

The present value of $200 one year from now when the interest rate is 7 percent is

Accepted Answer

The answer of The present value of $200 one year...

Question 17

The nominal interest rate minus the real interest rate approximately equals the

Accepted Answer

The nominal interest rate minus the real interest rate is a common approximation for the inflation rate. This relationship is derived from the Fisher equation, which illustrates how the nominal interest rate incorporates both the real interest rate and expected inflation.

Question 18

The real interest rate

Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate, not by adding it or having a direct positive relationship with inflation. This adjustment is made to reflect the true cost of borrowing or the real yield on savings, after accounting for the eroding effect of inflation on purchasing power.

Question 19

The nominal interest rate approximately equals which of the following?

Accepted Answer

The nominal interest rate approximately equals the real interest rate plus the inflation rate, according to the Fisher equation. This relationship helps to adjust for the effects of inflation on the value of interest earned or paid.

Question 20

The ________ interest rate approximately equals the ________ interest rate minus ________.

Accepted Answer

The answer of The ________ interest rate approximately equals the...

Quiz 7: Finance, Saving, and Investment

Approximately, the real interest rate the inflation rate the nominal interest rate.