1. The amount of interest paid on a debt security in dollar terms as a percent of the principal is referred to as the
a. expected real interest rate.
b. realized real interest rate.
c. after-tax real interest rate.
d. nominal interest rate.
2. The real interest rate is the nominal interest rate adjusted for expected or actual
a. unemployment.
b. production.
c. income growth.
d. inflation.
3. The nominal interest rate adjusted for expected inflation is the
a. expected real interest rate.
b. realized real interest rate.
c. after-tax real interest rate.
d. yield curve.
4. The nominal interest rate adjusted for actual inflation is the
a. expected real interest rate.
b. realized real interest rate.
c. after-tax real interest rate.
d. yield curve.
5. Another name for the expected real interest rate is the
a. securitized real interest rate.
b. realized real interest rate.
c. ex-post real interest rate.
d. ex-ante real interest rate.
6. Another name for the realized real interest rate is the
a. securitized real interest rate.
b. expected real interest rate.
c. ex-post real interest rate.
d. ex-ante real interest rate.
7. If the ex-post real interest rate is 5 percent and actual inflation rate is 2 percent, the nominal interest rate is
a. 7 percent.
b. 3 percent.
c. 2.5 percent.
d. 2 percent.
8. From 1972 to 1974, the expected real interest rate on short-term bonds averaged about +2 percent, but the realized
real interest rate averaged about −2 percent. The main reason for the difference was that
a. actual inflation was about 4 percentage points lower than expected inflation.
b. actual inflation was about 4 percentage points higher than expected inflation.
c. a monopoly cornered the market on short-term bonds.
d. nominal rate of interest was zero.
9. If the expected inflation rate was 7 percent and the actual inflation rate was 3 percent, then
a. borrowers gained in real terms at the expense of lenders.
b. lenders gained in real terms at the expense of borrowers.
c. borrowers and lenders were not affected.
d. the government gained because it collected more in taxes.
10. If the expected inflation rate is 3 percent, the nominal interest rate is 5 percent, and the actual inflation rate turns out
to be 4 percent, then the realized real interest rate is
relative to lenders.
a. less; gain
b. less; lose
c. greater; gain
d. greater; lose
than the expected real interest rate and borrowers
11. If the expected inflation rate was 4 percent and the actual inflation rate was 6 percent, then
a. borrowers gained in real terms at the expense of lenders.
b. lenders gained in real terms at the expense of borrowers.
c. borrowers and lenders were not affected.
d. the government lost because it collected less in taxes.
12. If the expected inflation rate is 4 percent, the nominal interest rate is 6 percent, and the actual inflation rate turns out
to be 2 percent, then the realized real interest rate is
relative to lenders.
a. less; gain
b. less; lose
c. greater; gain
d. greater; lose
than the expected real interest rate and borrowers
13. If the nominal interest rate was 4 percent, the expected real interest rate was 3 percent, and the realized real interest
rate was 5 percent, then the expected inflation rate was and the realized inflation rate was .
a. −1 percent; 1 percent
b. −1 percent; 2 percent
c. 1 percent; −1 percent
d. 1 percent; 1 percent
14. Suppose you bought an inflation-indexed security for $12,000 in January 2013 which pays an annual interest of 4
percent. If the value of the inflation index in January 2013 was 106 and its value in January 2014 was 105, what is
the value of the inflation-adjusted principal?
a. $12,114.29
b. $11,342.58
c. $8,000.60
d. $13,126.41
15. John bought an inflation-indexed security for $10,000 in January 2014. The security promises an annual interest rate
of 5 percent and makes payments twice a year. If the value of the inflation index in January 2014 was 106 and its
value in July 2014 was 105, John will receive an interest income of .
a. $504.76
b. $226.40
c. $182.72
d. $368.56
16. For every dollar’s worth of goods and services bought at an earlier date, the amount of money it would take now to
buy the same amount of goods and services after N years of inflation at rate p is called the
discount factor.
a. future
b. realized
c. expected
d. past
inflation
17. The price of a certain amount of goods and services a year back was $200. If price increased by 4 percent during
the year, how much money is required to buy the same amount of goods today?
a. $208
b. $204
c. $400
d. $404
18. What is the real present value of $5,202 to be received after two years if the expected rate of inflation over the next
two years is 2 percent ?
a. $5,000
b. $4,105
c. $4,807
d. $5,100
19. For every dollar’s worth of goods and services bought today, the amount of money it will take in N years to buy the
same amount of goods and services when the average future inflation rate is peis called the .
a. realized inflation discount factor.
b. future inflation discount factor.
c. future-augmented inflation factor.
d. past-adjusted inflation factor.
20. Suppose you buy an inflation-indexed bond that will adjust with inflation and thus pay you $1,500 in real (inflation-
adjusted) terms in one year. The nominal interest rate is 4 percent and the expected inflation rate is 2 percent. What
is the present value of the bond? (Round off your answer to the nearest dollar and pick the answer closest to the one
you calculate.)
a. $1,415
b. $1,442
c. $1,471
d. $1,530
21. Suppose you buy an inflation-indexed bond that will adjust with inflation and thus pay you $1,500 in real (inflation-
adjusted) terms in one year. The real interest rate is 3 percent. What is the present value of the bond? (Round off
your answer to the nearest dollar and pick the answer closest to the one you calculate.)
a. $1,415
b. $1,456
c. $1,471
d. $1,530
22. Suppose you buy an inflation-indexed bond that will adjust with inflation and thus pay you $1,500 in real (inflation-
adjusted) terms each year for the next five years, plus your real principal of $75,000 at the end of the fifth year. The
nominal interest rate is 5 percent and the expected inflation rate is 3 percent. What is the present value of the bond?
(Round off your answer to the nearest thousand dollars and pick the answer closest to the one you calculate.)
a. $65,000
b. $70,000
c. $74,000
d. $75,000
23. Suppose you buy an inflation-indexed bond that will adjust with inflation and thus pay you $1,500 in real (inflation-
adjusted) terms each year for the next five years, plus your real principal of $75,000 at the end of the fifth year. The
nominal interest rate is 5 percent and the expected inflation rate is 2 percent. What is the present value of the bond?
(Round off your answer to the nearest thousand dollars and pick the answer closest to the one you calculate.)
a. $65,000
b. $68,000
c. $72,000
d. $75,000
24. One year ago, you bought a bond for $40,000. Today, you received the $40,000 principal back plus an interest of
$2,000. If the inflation rate over the last year was 3 percent, calculate your real return (Round off your answer to the
nearest percentage point).
a. 2 percent
b. 3 percent
c. 4 percent
d. 5 percent
25. Realized real interest rates in the United States were often negative in the early
a. 1960s.
b. 1970s.
c. 1980s.
d. 1990s.
26. Realized real interest rates in the United States were the highest in the
a. 1960s.
b. 1970s.
c. 1980s.
d. 1990s.
27. Which of the following happens when the expected inflation rate rises?
a. Both the demand and supply curve for bonds shift upward.
b. The demand curve for bonds shift to the left.
c. The supply curve for bonds shift to the right.
d. The expected real interest rate rises.
28. The hypothesis that an increase in the expected inflation rate will cause the nominal interest rate to rise and the real
interest rate to remain unchanged is the
a. Fisher hypothesis.
b. rational-expectations theory.
c. Okun‘s hypothesis.
d. Keynesian hypothesis.
29. According to the Fisher hypothesis, if the real interest rate is 5 percent and the inflation rate rises from 2 percent to 4
percent, then the nominal interest rate will
percentage points.
a. rise by 0; −2
b. fall by 2; −2
c. rise by 2; 0
d. fall by 1; 1
percentage points and the real interest rate will change by
30. According to the Fisher hypothesis, an increase in the expected inflation rate should lead to in the nominal
interest rate and in the expected real interest rate.
a. an increase; a decrease
b. an increase; no change
c. an increase; an increase
d. a decrease; a decrease
31. According to the Fisher hypothesis, if the real interest rate is 2 percent and the inflation rate falls from 3 percent to 1
percent, then the nominal interest rate will
percentage points.
a. decline by 0; 2
b. increase by 2; 2
c. increase by 0; 0
d. decline by 2; 0
percentage points and the real interest rate will decline by
32. In recessions, the short-term expected real interest rate usually
a. rises by about 4 percentage points.
b. rises by about 2 percentage points.
c. declines by about 2 percentage points.
d. declines by about 4 percentage points.
33. In recessions, the long-term expected real interest rate usually
a. rises.
b. declines.
c. stays unchanged.
d. rises early in the recession; declines later in the recession.
34. Which of the following will NOT play a role in eliminating the shortcoming of the taxation system, particularly the
fact that the tax system taxes nominal return rather than real return?
a. Eliminating taxation of interest
b. Introducing inflation-indexed bonds
c. Taxing only real interest income, not nominal interest income
d. Reducing inflation to zero