Question 1

A firm takes out a 2-year loan at a nominal interest rate of 7 percent.It believes that the inflation rate will be 2 percent this year and 4 percent next year.What annual average real interest rate does the firm expect to pay?
A) 2 percent
B) 3 percent
C) 4 percent
D) 5 percent

Accepted Answer

The answer of A firm takes out a 2-year loan...

Question 2

Inflation expectations are an economic agent's beliefs about ________.
A) past inflation rates
B) present inflation rates
C) future inflation rates
D) all of the above

Accepted Answer

Inflation expectations refer to an economic agent's beliefs or forecasts about future inflation rates, which can influence their economic decision-making regarding prices, investments, and consumption. While past and present inflation rates may inform these expectations, they are not the same as inflation expectations themselves.

Question 3

When examining the effects of interest rates on borrowing decisions,we distinguish between the short-term and the long-term.How long is the long-term in this context?
A) 100 years or more
B) 10 years or more
C) 1 year or more
D) Anything longer than an overnight (24-hour) loan

Accepted Answer

The long-term in this context is generally considered to be 10 years or more. This is because interest rates on long-term loans, such as mortgages, are typically fixed for a period of 10-30 years, and borrowers make decisions based on these long-term rates. Short-term rates, on the other hand, can fluctuate more frequently and are often used for smaller loans, such as credit cards or short-term business loans.

Question 4

Firm investment depends most strongly on which of the following?
A) The federal funds rate
B) The long-term nominal interest rate
C) The inflation rate
D) The long-term real interest rate

Accepted Answer

The long-term real interest rate is the most important factor affecting firm investment. This is because it represents the cost of borrowing adjusted for inflation, and reflects the true opportunity cost of investing. A higher real interest rate means that borrowing is more expensive, and therefore firms may be more hesitant to invest because the returns may not be worth the cost.

Question 5

Differentiate between the adaptive expectations and the rational expectations models of inflation.

Accepted Answer

The answer of Differentiate between the adaptive expectations and the...

Question 6

A firm takes a 2-year loan at a nominal interest rate of 8 percent.It believes that the inflation rate will be 4 percent this year and 2 percent next year.What annual average real interest rate does the firm expect to pay?
A) 2 percent
B) 3 percent
C) 4 percent
D) 5 percent

Accepted Answer

The firm expects an average inflation rate of 3% over the two years (4% first year, 2% second year). The real interest rate is approximately the nominal rate minus the inflation rate: 8% - 3% = 5%.

Question 7

Before developing inflation expectations,Jenny reads through all available material on consumer price indexes and producer price indexes.Later,she also reads through recent magazines and newspapers to identify factors that could affect the inflation rate in the coming days.Jenny can be said to have ________.
A) adaptive expectations
B) rational expectations
C) marginal expectations
D) conditional expectations

Accepted Answer

Jenny's process of reviewing available information and analyzing potential factors to develop inflation expectations is consistent with the tenets of rational expectations theory. This theory posits that individuals use all available information to form expectations about future economic events. The other options (adaptive expectations, marginal expectations, and conditional expectations) do not accurately describe the process that Jenny is undertaking.

Question 8

George believes that the inflation rate will be around 9 percent this year because it was around 9 percent in the previous year.George can be said to have ________.
A) marginal expectations
B) rational expectations
C) adaptive expectations
D) composite expectations

Accepted Answer

George is using adaptive expectations, which is when an individual bases their future expectations on their observations from the past. He assumes that the inflation rate will be similar to the previous year's rate, without considering any other factors that may affect the inflation rate. This type of expectation is not based on rational or composite factors, but rather on past observations, making C the best choice.

Question 9

The model of expectations in which the current level of inflation depends on past levels is referred to as the ________.
A) composite expectations model
B) adaptive expectations model
C) rational expectations model
D) realized real expectations model

Accepted Answer

The model of expectations in which the current level of inflation depends on past levels is referred to as the adaptive expectations model. In this model, individuals update their expectations of inflation based on past experiences and the recent trend in inflation.

Question 10

Suppose that General Motors is deciding whether to build a new large automobile plant.It intends to borrow money to finance the new plant.Which of the following is NOT known to General Motors when it decides whether to build the new plant?
A) The expected real interest rate
B) The realized real interest rate
C) The expected nominal interest rate
D) The expected inflation rate

Accepted Answer

The realized real interest rate is the actual interest rate that GM will pay on its borrowed funds. GM cannot know this rate in advance since it will depend on market conditions at the time it actually borrows the funds. The other options (expected real interest rate, expected nominal interest rate, expected inflation rate) can be estimated or forecasted with some degree of accuracy before GM makes a decision about building the new plant.

Question 11

The model that states that individuals develop their inflation expectations after considering all available information is referred to as the ________.
A) composite expectations model
B) adaptive expectations model
C) rational expectations model
D) marginal expectations model

Accepted Answer

The model that states that individuals develop their inflation expectations after considering all available information is referred to as the rational expectations model. This model assumes that individuals are rational and make predictions based on all available information, including past experiences and current economic conditions.

Quiz 11: The Monetary System

A firm takes out a 2-year loan at a nominal interest rate of 7 percent.It believes that the inflation rate will be 2 percent this year and 4 percent next year.What annual average real interest rate does the firm expect to pay?

Inflation expectations are an economic agent's beliefs about ________.

When examining the effects of interest rates on borrowing decisions,we distinguish between the short-term and the long-term.How long is the long-term in this context?

Firm investment depends most strongly on which of the following?

Differentiate between the adaptive expectations and the rational expectations models of inflation.

A firm takes a 2-year loan at a nominal interest rate of 8 percent.It believes that the inflation rate will be 4 percent this year and 2 percent next year.What annual average real interest rate does the firm expect to pay?

George believes that the inflation rate will be around 9 percent this year because it was around 9 percent in the previous year.George can be said to have ________.

The model of expectations in which the current level of inflation depends on past levels is referred to as the ________.

Suppose that General Motors is deciding whether to build a new large automobile plant.It intends to borrow money to finance the new plant.Which of the following is NOT known to General Motors when it decides whether to build the new plant?

The model that states that individuals develop their inflation expectations after considering all available information is referred to as the ________.