CHAPTER 6
Quick Check
1. a. False. Nominal interest rates are expressed in dollars; real rates in goods.
f. True
j. True
n. True
2. a. exact: r = (1+.04)/(1+.02)-1 = 1.96%; approximation: r.04-.02 = 2%
3. The table is filled in
Situation nominal
policy
interest
rate
expected
inflation
real policy
interest rate
risk premium nominal
borrowing
interest rate
real borrowing
interest rate
A 3 0 303 3
a. Situation C and E
4. a.
Assets Liabilities
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Bank Assets 100 Checking Deposits 80
Net Worth
5. a. The real interest rate on the axis is the real policy rate
Dig Deeper
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6. a. If the interest rate on deposits at the central bank is negative, then the nominal policy
b. The real policy rate of interest is negative whenever expected inflation is larger than the
7. a.
Assets Liabilities
Other Assets 50
b. In principle, the bank’s capital has a value between -5 and 15. But in practice the equity
c. If the government pays 25 for the troubled assets, the value of bank capital will be -5.
d.
Assets Liabilities
Bank capital is now 20, and the bank is not insolvent.
e. Direct infusion of capital improves the solvency of the bank. Buying troubled assets does
8. a. The interest rate on the risky bond and the non-risky (safe) bond are the same.
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9. a. The risk premium is likely to fall. The IS curve will shift to the right. This will increase
b. The risk premium is likely to fall. The IS curve would shift right and output would
c. Strictly speaking, the increase in expected inflation does not directly affect the level of
Explore Further
10. Your answers to this question will vary with time.
11. Your answers to this question will vary with time
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