Chapter 02: Determination of Interest Rates
Chapter 02: Determination of Interest Rates
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c.
increased; outward
d.
increased; inward
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
9. The federal government’s demand for loanable funds is ____. If the budget deficit is expected to increase, the federal
government’s demand for loanable funds would ____.
a.
interest-elastic; decrease
b.
interest-elastic; increase
c.
interest-inelastic; increase
d.
interest-inelastic; decrease
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
10. Other things being equal, foreign governments and corporations would demand ____ U.S. funds if their local interest
rates were lower than U.S. rates. Therefore, for a given set of foreign interest rates, foreign demand for U.S. funds is ____
related to U.S. interest rates.
a.
less; inversely
b.
more; positively
c.
less; positively
d.
more; inversely
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
11. For a given set of foreign interest rates, the quantity of U.S. loanable funds demanded by foreign governments or firms
will be ____ U.S. interest rates.
a.
positively related to
b.
inversely related to
c.
unrelated to
d.
none of the above
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
Chapter 02: Determination of Interest Rates
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c.
decreases as the aggregate supply of loanable funds decreases.
d.
increases as the aggregate demand for loanable funds decreases.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
16. The equilibrium interest rate should
a.
fall when the aggregate supply of funds exceeds the aggregate demand for funds.
b.
rise when the aggregate supply of funds exceeds the aggregate demand for funds.
c.
fall when the aggregate demand for funds exceeds the aggregate supply of funds.
d.
rise when the aggregate demand for funds equals the aggregate supply of funds.
e.
B and C
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
17. Which of the following is likely to cause a decrease in the equilibrium U.S. interest rate, other things being equal?
a.
a decrease in saving by foreign savers
b.
an increase in inflation
c.
pessimistic economic projections that cause businesses to reduce expansion plans
d.
a decrease in saving by U.S. households
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
18. The Fisher effect states that the
a.
nominal interest rate equals the expected inflation rate plus the real rate of interest.
b.
nominal interest rate equals the real rate of interest minus the expected inflation rate.
c.
real rate of interest equals the nominal interest rate plus the expected inflation rate.
d.
expected inflation rate equals the nominal interest rate plus the real rate of interest.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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19. If the real interest rate was negative for a period of time, then
a.
inflation is expected to exceed the nominal interest rate in the future.
b.
inflation is expected to be less than the nominal interest rate in the future.
c.
actual inflation was less than the nominal interest rate.
d.
actual inflation was greater than the nominal interest rate.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
20. If inflation is expected to decrease, then
a.
savers will provide less funds at the existing equilibrium interest rate.
b.
the equilibrium interest rate will increase.
c.
the equilibrium interest rate will decrease.
d.
borrowers will demand more funds at the existing equilibrium interest rate.
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
21. If inflation turns out to be lower than expected
a.
savers benefit.
b.
borrowers benefit while savers are not affected.
c.
savers and borrowers are equally affected.
d.
savers are adversely affected but borrowers benefit.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
22. If the economy weakens, there is ____ pressure on interest rates. If the Federal Reserve increases the money supply
there is ____ pressure on interest rates (assume that inflationary expectations are not affected).
a.
upward; upward
b.
upward; downward
c.
downward; upward
d.
downward; downward
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
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23. What is the basis of the relationship between the Fisher effect and the loanable funds theory?
a.
the saver’s desire to maintain the existing real rate of interest
b.
the borrower‘s desire to achieve a positive real rate of interest
c.
the saver’s desire to achieve a negative real rate of interest
d.
B and C
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
24. Assume that foreign investors who have invested in U.S. securities decide to decrease their holdings of U.S. securities
and to instead increase their holdings of securities in their own countries. This should cause the supply of loanable funds
in the United States to______ and should place ____ pressure on U.S. interest rates.
a.
decrease; upward
b.
decrease; downward
c.
increase; downward
d.
increase; upward
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Application
25. Assume that foreign investors who have invested in U.S. securities decide to increase their holdings of U.S. securities.
This should cause the supply of loanable funds in the United States to ____ and should place ____ pressure on U.S.
interest rates.
a.
decrease; upward
b.
decrease; downward
c.
increase; downward
d.
increase; upward
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
Chapter 02: Determination of Interest Rates
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d.
increasing; less than
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Application
30. If economic expansion is expected to decrease, the demand for loanable funds should ____ and interest rates should
____.
a.
increase; increase
b.
increase; decrease
c.
decrease; decrease
d.
decrease; increase
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
31. The federal government’s spending policies are generally thought to be _________ interest rates, but municipal
governments’ spending is somewhat ________ interest rates.
a.
independent of; sensitive to
b.
sensitive to; independent of
c.
inversely rated to; positively related to
d.
positively related to; inversely related to
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
32. The federal government’s _________ determines the budget deficit and therefore determines the government’s
demand for loanable funds.
a.
monetary policy
b.
fiscal policy
c.
congressional policy
d.
economic policy
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
Chapter 02: Determination of Interest Rates
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d.
none of the above
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
37. If the aggregate demand for loanable funds increases without a corresponding ____ in aggregate supply, there will be
a ____ of loanable funds.
a.
increase; surplus
b.
increase; shortage
c.
decrease; surplus
d.
decrease; shortage
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
38. A ____ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate,
causing an ____ shift in the demand schedule.
a.
b.
c.
d.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
39. Which of the following is not true regarding foreign interest rates?
a.
The large flow of funds between countries causes interest rates in any given country to become more
susceptible to interest rate movements in other countries.
b.
The expectations of a strong dollar should cause a flow of funds to the United States.
c.
An increase in a foreign country’s interest rates will encourage investors in that country to invest their funds in
other countries.
d.
All of the above are true regarding foreign interest rates.
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
Chapter 02: Determination of Interest Rates
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d.
positive; downward
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
44. Other things being equal, a ____ quantity of U.S. funds would be demanded by foreign governments and corporations
if their domestic interest rates were ____ relative to U.S. rates.
a.
b.
c.
d.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Application
45. The federal government demand for funds is said to be interest-inelastic, or ____ to interest rates.
a.
sensitive
b.
insensitive
c.
relatively sensitive as compared to other sectors
d.
none of the above
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
46. In computing the net present value of a proposed project, the required rate of return to implement the project will be
______ if interest rates are ________.
a.
lower; higher
b.
lower; lower
c.
higher; lower
d.
higher; unchanged
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
Chapter 02: Determination of Interest Rates
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ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
51. The federal government’s demand for funds is ________, and municipal governments’ demand for funds is somewhat
____________.
a.
interest-inelastic; interest-inelastic
b.
interest-elastic; interest-elastic
c.
interest-inelastic; interest-elastic
d.
interest-elastic; interest-inelastic
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
52. The substantial decline in interest rates during the credit crisis is attributed to which of the following changes in the
market for loanable funds?
a.
an increase in both the supply of and the demand for loanable funds
b.
a decrease in both the supply of and the demand for loanable funds
c.
a decrease in the supply of loanable funds and an increase in the demand for loanable funds
d.
an increase in the supply of loanable funds and a decrease in the demand for loanable funds
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
53. The crowding-out effect occurs when:
a.
foreign investors crowd out U.S. investors in the market for loanable funds.
b.
the federal government’s demand for loanable funds due to a higher budget deficit crowds out the private
demand in the market for loanable funds.
c.
institutional investors crowd out individual investors in the market for loanable funds.
d.
firms and municipal governments crowd out households in the market for loanable funds.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
Chapter 02: Determination of Interest Rates
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a.
True
b.
False
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
59. If foreign interest rates fall, foreign firms and governments would likely reduce their demand for U.S. funds.
a.
True
b.
False
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
60. Since the aggregate demand for loanable funds is the sum of the quantities demanded by the separate sectors, and
since most of these sectors are likely to demand a larger quantity of funds at lower interest rates (other things being
equal), the aggregate demand for loanable funds is positively related to interest rates at any point in time.
a.
True
b.
False
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
61. In general, suppliers of loanable funds are willing to supply more funds if the interest rate is higher.
a.
True
b.
False
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
62. If the aggregate demand for loanable funds increases without a corresponding increase in aggregate supply, there will
be a surplus of loanable funds.
a.
True
b.
False
Chapter 02: Determination of Interest Rates
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ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
63. The relationship between interest rates and expected inflation is often referred to as the loanable funds theory.
a.
True
b.
False
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
64. According to the Fisher effect, if the real interest rate is zero, the nominal interest rate must be equal to the expected
inflation rate.
a.
True
b.
False
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
65. To forecast interest rates using the Fisher effect, the real interest rate for an upcoming period can be forecasted by
subtracting the expected inflation rate over that period from the nominal interest rate quoted for that period.
a.
True
b.
False
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
66. According to the Fisher effect, when the inflation rate is lower than anticipated, the real interest rate is relatively low.
a.
True
b.
False
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
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67. Forecasters should consider future plans for corporate expansion and the future state of the economy when forecasting
business demand for loanable funds.
a.
True
b.
False
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.02.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge