Question 1

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

The real interest rate reflects the true cost of borrowing after adjusting for inflation, making it the opportunity cost of borrowed funds. It is calculated by subtracting the inflation rate from the nominal interest rate, thus making both statements I and II correct.

Question 2

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 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 to account for the inflation rate.

Question 3

When the inflation rate is negative, the

Accepted Answer

When the inflation rate is negative, the real interest rate is greater than the nominal interest rate. This is because the nominal interest rate is typically positive while the real interest rate adjusts for inflation. A negative inflation rate means that the cost of goods and services has decreased, which creates a situation where the real interest rate is higher than the nominal interest rate.

Question 4

When the inflation rate is positive, the

Accepted Answer

When the inflation rate is positive, the real interest rate is less than the nominal interest rate. This is because the nominal interest rate does not take into account the effects of inflation, and the real interest rate is the nominal interest rate adjusted for inflation. Therefore, when inflation is present, the real interest rate will be lower than the nominal interest rate.

Question 5

-Use the information in the table above to calculate the value of government saving.

Accepted Answer

The answer of 
-Use the information in the table above...

Question 6

If the nominal interest rate is 7 percent and the inflation rate is 1 percent, the real interest rate is approximately

Accepted Answer

Real interest rate = Nominal interest rate - Inflation rate
Real interest rate = 7% - 1%
Real interest rate = 6%

Question 7

The nominal interest rate approximately equals which of the following?

Accepted Answer

The nominal interest rate is the sum of the real interest rate and the expected or actual inflation rate. This is because the nominal interest rate represents the return on an investment before accounting for inflation, so it must include both the real return and the increase in prices over time.

Question 8

If people expect an inflation rate of 3.3 percent, and the real interest rate is 3 percent, the nominal interest rate equals (approximately)

Accepted Answer

The nominal interest rate can be found using the Fisher equation:

Nominal interest rate = Real interest rate + Expected inflation rate

Substituting the values given in the question, we get:

Nominal interest rate = 3% + 3.3% = 6.3%

Therefore, the best choice is C, with a nominal interest rate of 6.3%.

Question 9

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

Accepted Answer

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

Question 10

-Use the information in the table above to calculate the value of national saving.

Accepted Answer

National saving is calculated as the sum of private saving and public saving. Private saving is the difference between what households earn (income) and what they spend (consumption) plus taxes. Public saving is the difference between government tax revenues and government spending. Without the specific numbers from the table, the exact calculation cannot be shown, but the correct answer based on the provided options is $25 million.

Question 11

When the inflation rate is zero, the

Accepted Answer

When the inflation rate is zero, the real interest rate and nominal interest rate are equivalent, therefore option D is correct.

Question 12

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

Accepted Answer

The nominal interest rate represents the rate at which money is borrowed or invested, while the real interest rate adjusts for inflation. Therefore, the difference between the nominal and real interest rates reflects the inflation rate.

Question 13

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

Accepted Answer

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

Question 14

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 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

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

Accepted Answer

According to the Fisher equation, nominal interest rate = real interest rate + inflation rate. Assuming the real interest rate remains constant, a decrease in inflation rate from 7 to 3 percent would result in a decrease in nominal interest rate by 4 percentage points (7 - 3 = 4).

Question 17

If the nominal interest rate is 8 percent and inflation is 3 percent, approximately what is the real interest rate?

Accepted Answer

Real interest rate is nominal interest rate minus inflation rate. So, in this case, real interest rate would be 5 percent (8% - 3%).

Question 18

Suppose Country A had net taxes of $30 million and government expenditures of $35 million. In addition, household saving in Country A totaled $5 million while consumption was $80 million. The government of Country A is running a budget ________ and national saving is ________ million.

Accepted Answer

The government is running a deficit because its expenditures ($35 million) exceed its net taxes ($30 million). National saving is calculated as the sum of government saving (net taxes minus government expenditures) and private saving (household saving). Here, government saving is -$5 million ($30 million - $35 million) and household saving is $5 million, totaling $0 million in national saving.

Question 19

Suppose that you took out a $1000 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 ($1000), 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 20

The real interest rate

Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. This is because the nominal interest rate includes the effect of inflation, so we need to adjust for inflation in order to determine the true return on an investment. Therefore, the real interest rate is approximately equal to the nominal interest rate minus the inflation rate.

Quiz 7: Finance, Saving, and Investment

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.