Question 1

If you lend a dollar for a year and at the end of the year the price level has risen by 10 percent,
A) you must have earned a nominal interest rate of 10 percent to maintain the purchasing power of your loan.
B) you must have earned a nominal interest rate of 5 percent to maintain the purchasing power of your loan.
C) the purchasing power of your loan has risen over the year regardless of the interest rate at which you lent it.
D) the purchasing power of your loan has remained constant over the year regardless of the interest rate at which you lent it.

Accepted Answer

To maintain the purchasing power of your loan when the price level rises by 10%, you need to earn a nominal interest rate of at least 10%. This compensates for the inflation and preserves the real value of the money lent.

Question 2

If the nominal interest rate is 8 percent and the inflation rate is 2 percent, the real interest rate is approximately
A) 0.25 percent.
B) 6 percent.
C) 4 percent.
D) 10 percent.

Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. Therefore, 8% - 2% = 6%.

Question 3

People know that the inflation rate will decrease from 7 percent to 3 percent. As a result
A) the nominal interest rate rises by 4 percentage points.
B) the nominal interest rate is constant.
C) the nominal interest rate falls by 4 percentage points.
D) the nominal interest rate equals 3 percent.

Accepted Answer

When the inflation rate decreases, the nominal interest rate typically falls by the same amount to maintain the real interest rate, assuming the real interest rate remains constant.

Question 4

If the nominal interest rate is 11 percent and the inflation rate is 9 percent, then the real interest rate is approximately
A) 20 percent.
B) 18 percent.
C) 2 percent.
D) 4 percent.

Accepted Answer

The real interest rate is approximately the nominal interest rate minus the inflation rate, so 11% - 9% = 2%.

Question 5

When the inflation rate is negative, the
A) real interest rate is less than the nominal interest rate.
B) nominal interest rate is zero.
C) real interest rate equals the nominal interest rate.
D) real interest rate is greater than the nominal interest rate.

Accepted Answer

When the inflation rate is negative, it means prices are falling, which increases the real interest rate relative to the nominal interest rate.

Question 6

If the nominal interest rate is 8 percent and the current inflation rate is 3 percent, approximately what is the real interest rate?
A) 8 percent
B) 3 percent
C) 11 percent
D) 5 percent

Accepted Answer

Real interest rate is calculated by subtracting inflation rate from nominal interest rate. Therefore, the real interest rate in this scenario would be 5 percent (8 percent - 3 percent).

Question 7

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.
A) I
B) II
C) both I and II
D) neither I nor II

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 8

The nominal interest rate minus the real interest rate approximately equals the
A) rate of increase in the amount of investment.
B) the rate of increase in the income.
C) inflation rate.
D) the rate the bank receives to cover lending costs.

Accepted Answer

The nominal interest rate represents the total rate of interest charged by a lender for borrowing money, while the real interest rate adjusts the nominal rate for inflation. Therefore, subtracting the real interest rate from the nominal interest rate approximately equals the inflation rate. This is because the real interest rate reflects the true cost of borrowing, after adjusting for inflation.

Question 9

When the inflation rate is positive, the
A) real interest rate equals the nominal interest rate.
B) real interest rate is less than the nominal interest rate.
C) nominal interest rate is zero.
D) real interest rate is greater than the nominal interest rate.

Accepted Answer

When the inflation rate is positive, the real interest rate (nominal interest rate minus inflation rate) is less than the nominal interest rate. This is because the nominal interest rate does not fully account for the decrease in purchasing power caused by inflation, leading to a lower real return on investment.

Question 10

The interest rate approximately equals the interest rate minus .
A) real; nominal; the inflation rate
B) nominal; real; the inflation rate
C) nominal; real; depreciation
D) real; nominal; depreciation

Accepted Answer

The real interest rate is approximately equal to the nominal interest rate minus the inflation rate.

Question 11

People expect an inflation rate of 5 percent and the real interest rate is positive. Then the nominal interest rate will be
A) 5 percent.
B) less than 5 percent.
C) more than 5 percent.
D) Without more information it is impossible to tell if the nominal interest rate will be more than, less than, or equal to 5 percent.

Accepted Answer

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 will be more than 5 percent.

Question 12

People know that the inflation rate will increase from 3 percent to 5 percent. As a result
A) the nominal interest rate is constant.
B) the nominal interest rate falls by 2 percentage points.
C) the real interest rate rises by 2 percentage points.
D) the nominal interest rate rises by 2 percentage points.

Accepted Answer

According to the Fisher equation, nominal interest rate = real interest rate + expected inflation rate. If the inflation rate is expected to increase from 3% to 5%, then the expected inflation rate increases by 2 percentage points. To keep the real interest rate constant, the nominal interest rate must rise by the same amount (2 percentage points). Therefore, the correct answer is D.

Question 13

If people expect an inflation rate of 3.3 percent, and the real interest rate is 3 percent, the nominal interest rate equals approximately)
A) 6.3 percent.
B) 9.9 percent.
C) 0.3 percent.
D) 8.6 percent.

Accepted Answer

The nominal interest rate is approximately the sum of the real interest rate and the expected inflation rate. Therefore, 3% (real interest rate) + 3.3% (expected inflation rate) = 6.3%.

Question 14

If the nominal interest rate is 8 percent and inflation is 3 percent, approximately what is the real interest rate?
A) 5 percent
B) 11 percent
C) 3 percent
D) 8 percent

Accepted Answer

Real interest rate = nominal interest rate - inflation rate
Real interest rate = 8% - 3%
Real interest rate = 5%

Question 15

If the nominal interest rate is 7 percent and the inflation rate is 1 percent, the real interest rate is approximately
A) 8 percent.
B) 6 percent.
C) -6 percent.
D) 7 percent.

Accepted Answer

Real Interest Rate = Nominal Interest Rate - Inflation Rate 
= 7% - 1% 
= 6%

Question 16

When the inflation rate is zero, the
A) nominal interest rate is zero.
B) real interest rate equals the nominal interest rate.
C) real interest rate is greater than the nominal interest rate.
D) real interest rate is less than the nominal interest rate.

Accepted Answer

When inflation rate is zero, the real interest rate is equal to the nominal interest rate, since there is no inflation to adjust for.

Question 17

The nominal interest rate approximately equals which of the following?
A) the real interest rate plus the growth rate of real GDP
B) the real interest rate minus the inflation rate
C) the real interest rate minus the growth rate of real GDP
D) the real interest rate plus the inflation rate

Accepted Answer

The nominal interest rate is the sum of the real interest rate and the inflation rate. This is because the nominal interest rate represents the total amount of compensation that a lender receives for deferring consumption and taking on risk, and this compensation includes both the real interest earned on the loan and the compensation for the loss of purchasing power caused by inflation.

Question 18

The real interest rate
A) is approximately equal to the nominal interest rate plus the inflation rate.
B) is positively related to the inflation rate.
C) is approximately equal to the nominal interest rate minus the inflation rate.
D) can never be negative.

Accepted Answer

The real interest rate is the nominal interest rate minus the inflation rate. This is because the nominal interest rate accounts for both the actual borrowing cost and the expected inflation rate, while the real interest rate only accounts for the actual borrowing cost. Therefore, the real interest rate is a more accurate measure of the true cost of borrowing or the return on investment.

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?
A) The real interest rate is 6 percent and the nominal interest rate is 7.5 percent.
B) The nominal interest rate is 7.5 percent and the real interest rate is 13.5 percent.
C) The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent.
D) The real interest rate is 7.5 percent and the nominal interest rate is 1.5 percent.

Accepted Answer

The nominal interest rate is 7.5 percent, which is given in the problem. To calculate the real interest rate, we need to adjust the nominal interest rate for inflation using the formula (1 + nominal interest rate) / (1 + inflation rate) - 1. Plugging in the values, we get (1 + 0.075) / (1 + 0.06) - 1, which simplifies to approximately 0.015 or 1.5 percent. Therefore, the correct answer is C.

Question 20

Approximately, the real interest rate the inflation rate the nominal interest rate.
A) equals; plus
B) minus; equals
C) equals; minus
D) plus; equals

Accepted Answer

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

Quiz 7: Finance, Saving, and Investment

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

If the nominal interest rate is 8 percent and the inflation rate is 2 percent, the real interest rate is approximately

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

If the nominal interest rate is 11 percent and the inflation rate is 9 percent, then the real interest rate is approximately

When the inflation rate is negative, the

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

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.

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

When the inflation rate is positive, the

The interest rate approximately equals the interest rate minus .

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

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

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

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

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

When the inflation rate is zero, the

The nominal interest rate approximately equals which of the following?

The real interest rate

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?

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