b.
The dollar value of savings increased at 3.5 percent, and the value of savings measured in
goods increased at 1.5 percent.
c.
The dollar value of savings increased at 3.5 percent, and the value of savings measured in
goods increased at 5 percent.
d.
The dollar value of savings increased at 5 percent, and the value of savings measured in
goods increased at 1.5 percent.
100. Other things the same, when the interest rate rises
a.
people would want to lend more, making the supply of loanable funds increase.
b.
people would want to lend less, making the supply of loanable funds decrease.
c.
people would want to lend more, making the quantity of loanable funds supplied increase.
d.
people would want to lend less, making the quantity of loanable funds supplied decrease.
101. If there is a surplus of loanable funds
a.
the quantity of loanable funds demanded is greater than the quantity of loanable funds
supplied and the interest rate is above equilibrium.
b.
the quantity of loanable funds demanded is greater than the quantity of loanable funds
supplied and the interest rate is below equilibrium.
c.
the quantity of loanable funds supplied is greater than the quantity of loanable funds
demanded and the interest rate is above equilibrium.
d.
the quantity of loanable funds supplied is greater than the quantity of loanable funds
demanded and the interest rate is below equilibrium.
102. If there is a shortage of loanable funds, then
a.
the quantity of loanable funds demanded is greater than the quantity of loanable funds
supplied and the interest rate is above equilibrium.
b.
the quantity of loanable funds demanded is greater than the quantity of loanable funds
supplied and the interest rate is below equilibrium.
c.
the quantity of loanable funds supplied is greater than the quantity of loanable funds
demanded and the interest rate is above equilibrium.
d.
the quantity of loanable funds supplied is greater than the quantity of loanable funds
demanded and the interest rate is below equilibrium.
103. If there is shortage of loanable funds, then
a.
the supply for loanable funds shifts right and the demand shifts left.
b.
the supply for loanable funds shifts left and the demand shifts right.
c.
neither curve shifts, but the quantity of loanable funds supplied increases and the quantity
demanded decreases as the interest rate rises to equilibrium.
d.
neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity
demanded increases as the interest rate falls to equilibrium.
104. If there is surplus of loanable funds, then
a.
the supply for loanable funds shifts right and the demand shifts left.
b.
the supply for loanable funds shifts left and the demand shifts right.
c.
neither curve shifts, but the quantity of loanable funds supplied increases and the quantity
demanded decreases as the interest rate rises to equilibrium.
d.
neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity
demanded increases as the interest rate falls to equilibrium.
105. If a reform of the tax laws encourages greater saving, the result would be
a.
higher interest rates and greater investment.
b.
higher interest rates and less investment.
c.
lower interest rates and greater investment.
d.
lower interest rate and less investment.
106. What would happen in the market for loanable funds if the government were to decrease the tax rate on
interest income?
a.
the supply of loanable funds would shift right and investment would increase.
b.
the supply of loanable funds would shift left and investment would decrease.
c.
the demand for loanable funds would shift right and investment would increase.
d.
the demand for loanable funds would shift left and investment would decrease.
107. You put money into an account. One year later you see that you have 5 percent more dollars and that
your money will buy 6 percent more goods.
a.
The nominal interest rate was 11 percent and the inflation rate was 5 percent.
b.
The nominal interest rate was 6 percent and the inflation rate was 5 percent.
c.
The nominal interest rate was 5 percent and the inflation rate was −1 percent.
d.
None of the above is correct.
108. You put money into an account. One year later you see that you have 6 percent more dollars and that
your money will buy 2 percent more goods.
a.
The nominal interest rate was 8 percent and the inflation rate was 6 percent.
b.
The nominal interest rate was 6 percent and the inflation rate was 4 percent.
c.
The nominal interest rate was 4 percent and the inflation rate was 2 percent.
d.
None of the above is correct.
109. If expected inflation is constant, then when the nominal interest rate increases, the real interest rate
a.
increases by more than the change in the nominal interest rate.
b.
increases by the change in the nominal interest rate.
c.
decreases by the change in the nominal interest rate.
d.
decreases by more than the change in the nominal interest rate.
110. If expected inflation is constant, then when the nominal interest rate falls, the real interest rate
a.
falls by more than the change in the nominal interest rate.
b.
falls by the change in the nominal interest rate.
c.
rises by the change in the nominal interest rate.
d.
rises by more than the change in the nominal interest rate.
111. If expected inflation is constant and the nominal interest rate increased 3 percentage points, the real
interest rate would
a.
increase 3 percentage points.
b.
increase, but by less than 3 percentage points.
c.
decrease, but by less than 3 percentage points.
d.
decrease by 3 percentage points.
112. The “loanable funds market” is a term used by economists to describe the
a.
demand for goods and services by households.
b.
market that includes resources such as labor and capital.
c.
supply of goods and services by firms.
d.
market that coordinates the borrowing and lending of individuals and firms.
113. The price that a person must pay in order acquire purchasing power now rather than in the future is
called
a.
the interest rate.
b.
the foreign exchange rate.
c.
the inflationary premium.
d.
the risk premium.
114. The nominal (money) rate of interest
a.
is the real rate of interest plus the inflationary premium.
b.
can be expected to decline as inflation accelerates.
c.
fell to historic lows during the 1970s when the United States experienced double-digit
rates of inflation.
d.
can be expected to increase when the government is running a budget surplus.
115. The money interest rate may be a misleading indicator of real borrowing costs when
a.
the unemployment rate is high.
b.
the actual rate of unemployment exceeds the natural rate of unemployment.
c.
the inflation rate is high.
d.
real output is declining.
116. In the loanable funds market, the price that borrowers must pay for earlier availability is the
a.
inflation rate.
b.
wage rate.
c.
interest rate.
d.
exchange rate.
117. Suppose business decision makers become more optimistic about future economic conditions and
desire additional funds to expand their plant capacity. What is the likely effect on the loanable funds
market?
a.
The demand for loanable funds will increase, and the interest rate will rise.
b.
The demand for loanable funds will decrease, and the interest rate will fall.
c.
The supply for loanable funds will increase, and the interest rate will fall.
d.
The supply for loanable funds will decrease, and the interest rate will rise.
118. Which of the following events would cause the interest rate to rise?
a.
a decrease in the demand for loanable funds
b.
an increase in the demand for loanable funds
c.
an increase in the supply for loanable funds
d.
a decrease in aggregate demand
119. The real rate of interest equals the
a.
money rate of interest minus the expected inflation rate.
b.
money rate of interest plus the expected inflation rate.
c.
inflationary premium.
d.
nominal rate of interest.
120. The real rate of interest is
a.
interest paid by commercial banks.
b.
interest paid by the Fed.
c.
equal to the money rate of interest plus the inflationary premium.
d.
the money rate of interest adjusted for inflation.
121. If the expected rate of inflation is zero, the real interest rate must
a.
also equal zero.
b.
be greater than the money (nominal) interest rate.
c.
be equal to the money (nominal) interest rate.
d.
be less than the money (nominal) interest rate.
122. The real interest rate is
a.
the premium that borrowers must pay in order to acquire more purchasing power.
b.
the reward lenders receive in exchange for their willingness to delay consumption into the
future.
c.
equal to the money interest rate minus the inflationary premium.
d.
all of the above.
123. An increase in the real interest rate will
a.
increase the inflationary premium.
b.
decrease the inflationary premium.
c.
increase the price of current consumption relative to future consumption.
d.
decrease the price of current consumption relative to future consumption.
124. An increase in the real interest rate will
a.
lead to an increase in the expected inflation rate.
b.
increase the real cost of purchasing goods and services in the current period relative to
future periods.
c.
encourage borrowers to demand a larger quantity of funds.
d.
reduce the quantity of funds supplied to the loanable funds market.
125. The difference between the money interest rate and the real interest rate is the
a.
prime interest rate.
b.
nominal interest rate.
c.
exchange rate.
d.
inflationary premium.
126. The difference between the money rate of interest and the real rate of interest is often called the
a.
real balance effect.
b.
prime interest rate.
c.
inflationary premium.
d.
discount rate.
127. Which of the following equations is accurate?
a.
money interest rate = real interest rate − inflationary premium
b.
real interest rate = money interest rate + inflationary premium
c.
real interest rate = money interest rate − inflationary premium
d.
real interest rate = money interest rate
128. The money rate of interest will be less than the real rate of interest when decision makers anticipate
a.
stable prices in the future.
b.
falling prices in the future.
c.
inflation in the future.
d.
that the money rate of interest will decline.
129. Other things constant, an increase in the expected inflation rate will
a.
decrease the inflationary premium.
b.
increase money (nominal) interest rates.
c.
increase the supply of loanable funds.
d.
decrease the money interest rate.
130. If people suddenly anticipate that inflation will rise during the next year, which of the following is
most likely?
a.
Nominal interest rates will rise.
b.
Nominal interest rates will decline.
c.
The demand for goods and services will decline.
d.
Both the real and nominal interest rates will decline.
131. Marquis borrowed $1,000 from Ayana for a year and agreed to repay her $1,050 at the end of the year.
If the inflation rate was 3 percent, what is the real rate of interest Ayana received?
a.
10 percent
b.
5 percent
c.
3 percent
d.
2 percent
e.
−2 percent
132. Darius lent Alejandro $1,000 for one year with the understanding that Alejandro would repay $1,070.
If the actual inflation rate was 7 percent, what was the real rate of interest Darius received?
a.
14 percent
b.
7 percent
c.
4 percent
d.
0 percent
e.
−7 percent
133. A firm’s level of investment is tied to the interest rate
a.
only when the firm has to borrow funds to buy capital
b.
only when the firm has to borrow funds to buy stocks
c.
only when the firm already has the funds and could lend them
d.
because the interest rate represents the opportunity cost of investing in capital
e.
because investments are always made with borrowed funds
134. Suppose people expect inflation to be 3 percent during the next several years. When the real interest
rate is 5 percent, the money, or nominal interest rate, will be
a.
1 percent.
b.
4 percent.
c.
7 percent.
d.
8 percent.
135. People anticipate inflation will be 3 percent during the next several years. If this is true, when the real
interest rate is 4 percent, the money interest rate will be
a.
1 percent.
b.
3 percent.
c.
4 percent.
d.
7 percent.
136. Suppose that you purchase a $5,000 bond that pays 7 percent interest annually and matures in five
years. If you expect that the inflation rate during the next five years will be 2 percent annually, what
real rate of return do you expect to earn?
a.
2 percent
b.
5 percent
c.
7 percent
d.
9 percent
137. If a person earns an 8 percent nominal rate of interest on his savings account in a year when inflation is
9 percent, the person’s real rate of interest is
a.
−1 percent.
b.
1 percent.
c.
8 percent.
d.
9 percent.
138. If the money interest rate is 7 percent and the inflationary premium 4 percent, the real interest rate is
a.
−3 percent.
b.
3 percent.
c.
4 percent.
d.
7 percent.
139. Initially, the nominal rate of interest is 8 percent and inflation is 4 percent. The nominal interest rate
then rises to 12 percent and the inflation rate to 8 percent. It follows that the real rate of interest has
a.
fallen.
b.
remained the same.
c.
risen to 8 percent.
d.
risen to 10 percent.
140. If the expected inflation rate is 3 percent and banks charge a 10 percent money rate of interest, the real
rate of interest is
a.
3 percent.
b.
7 percent.
c.
10 percent.
d.
17 percent.
141. When persistent inflation is present, we would expect
a.
borrowers to systematically gain at the expense of lenders.
b.
lenders to systematically gain at the expense of borrowers.
c.
nominal interest rates to be higher than would be true if prices were stable.
d.
nominal interest rates to be lower than real interest rates.
142. During a period of persistent inflation,
a.
borrowers will systematically gain at the expense of lenders.
b.
nominal interest rates will rise and eventually reflect the expected rate of inflation.
c.
once borrowers and lenders fully anticipate the inflation rate, there is no reason to expect
that either will systematically gain relative to the other.
d.
both b and c are correct.
143. Of the following, who would most likely be hurt by an unanticipated increase in the rate of inflation?
a.
an individual with a 30-year fixed-rate home mortgage loan
b.
the U.S. federal government because it has a large quantity of outstanding debt
c.
lenders who have made long-term loans at fixed interest rates
d.
Social Security recipients whose benefits are adjusted upward as the general level of prices
increases
144. If a lender expects inflation to be 5 percent, and after a loan is made, actual inflation is 10 percent,
which of the following will be true?
a.
The lender will receive a lower real interest rate than he expected.
b.
The loan will be repaid with dollars that are worth more than the lender expected.
c.
The nominal rate of interest can be expected to fall in the future.
d.
The lender will gain at the expense of the borrower.
145. Suppose the annual rate of inflation has been 3 percent during each of the last three years and that
borrowers and lenders have come to expect this rate of inflation. If the inflation rate unexpectedly
rises,
a.
borrowers gain at the expense of lenders.
b.
lenders will gain at the expense of borrowers.
c.
the real interest rate will exceed the nominal interest rate.
d.
there is no reason to expect that the inflation will help borrowers relative to lenders.
146. You just bought a $1,000 bond that is scheduled to mature in ten years. If interest rates rise during the
next six months, the market value (or price) of your bond will
a.
increase.
b.
decrease.
c.
remain unchanged.
d.
increase or decrease, depending on the marginal tax bracket you are in.
147. Falling interest rates cause the market value of previously issued bonds to
a.
rise.
b.
fall.
c.
remain unchanged.
d.
increase during periods of inflation but decline during periods of deflation.
148. As the real interest rate in the domestic loanable funds market increases,
a.
the cost of purchasing goods and services during the current period will decline.
b.
the net inflow of capital from abroad will increase.
c.
the inflationary premium will rise, and the money rate of interest will decline.
d.
the inflationary premium will fall, and the money rate of interest will rise.
149. The exchange rate is
a.
another term for “interest rate.”
b.
another term for “growth rate.”
c.
the rate at which goods trade for one another across international borders.
d.
the price of one currency in terms of another currency.
150. If the dollar appreciates relative to the Yen, it can be said that
a.
Japanese citizens respect the United States more.
b.
the dollar increases in value within the United States.
c.
the Yen depreciates relative to the dollar.
d.
it takes more dollars to buy Yen.
151. If the dollar depreciates relative to the Peso, it can be said that
a.
Mexican citizens no longer respect the United States.
b.
the dollar falls in value within the United States.
c.
it takes fewer dollars to buy Pesos.
d.
the Peso appreciates relative to the dollar.
152. If the quantity supplied of euro were greater than the quantity demanded, then the price of the
a.
euro would rise.
b.
euro would fall.
c.
dollar would fall.
d.
euro would be in equilibrium.
153. If the quantity of euro demanded were greater than the quantity supplied, then the price of the
a.
euro would rise.
b.
euro would fall.
c.
dollar would rise.
d.
euro would be in equilibrium.
154. Which of the following would generate a dollar demand for the euro?
a.
American exports to Europe.
b.
European demand for U.S. government bonds.
c.
American demand for European real estate.
d.
All of the above are correct.
155. Which of the following would generate a supply of euros in exchange for dollars?
a.
American demand for European real estate.
b.
European demand for U.S. government bonds.
c.
Americans vacationing in Europe.
d.
Purchase of French wines by U.S. importers.