Question 1

Interest rates move ______ with expected inflation; _____ with economic activity.

Accepted Answer

A)  directly/inversely 
B)  inversely/inversely 
C)  directly/directly 
D)  inversely/directly 
A)  directly/inversely 
B)  inversely/inversely 
C)  directly/directly 
D)  inversely/directly

Question 2

The Fisher Effect holds that nominal interest rates include an expected inflation rate.

Accepted Answer

A) True 
 B)False

Question 3

The demand for loanable funds may shift upward (increase) from

Accepted Answer

A)  a decline in the supply of loanable funds. 
B)  a decline in business prospects. 
C)  an improvement in technology. 
D)  an expectation of an upcoming recession. 
A)  a decline in the supply of loanable funds. 
B)  a decline in business prospects. 
C)  an improvement in technology. 
D)  an expectation of an upcoming recession.

Question 4

An investor loaned money at 14 percent with an expected rate of inflation of 11 percent. During the year the actual rate of inflation was 8 percent. The investor's expected real rate of interest was _____ and the realized real rate for the investor was ______?

Accepted Answer

A)  14 percent; 8 percent. 
B)  6 percent; 3 percent. 
C)  3 percent; 3 percent. 
D)  3 percent; 6 percent. 
A)  14 percent; 8 percent. 
B)  6 percent; 3 percent. 
C)  3 percent; 3 percent. 
D)  3 percent; 6 percent.

Question 5

Explain why realized real rates of interest are sometimes negative, but expected real rates are always positive. Give an example.

Accepted Answer

By definition, no lending would occur if

Question 6

The current rate of inflation affects the expected level of interest rates.

Accepted Answer

A) True 
 B)False

Question 7

Economies with very high current and expected inflation rates

Accepted Answer

A)  will have a significant long-term debt market. 
B)  will have debt instruments with interest rates indexed to the inflation rate. 
C)  will favor long-term financing over short-term. 
D)  will have very low interest rates. 
A)  will have a significant long-term debt market. 
B)  will have debt instruments with interest rates indexed to the inflation rate. 
C)  will favor long-term financing over short-term. 
D)  will have very low interest rates.

Question 8

For a investment project to be accepted by management, its return must exceed the firm's cost of capital.

Accepted Answer

A) True 
 B)False

Question 9

The market rate of interest can be viewed as the real rate of interest plus a premium for the expected rate of inflation.

Accepted Answer

A) True 
 B)False

Question 10

Economic models forecast interest rates then estimate measures of economic output.

Accepted Answer

A) True 
 B)False

Question 11

If the real rate of interest is 4%, actual inflation for the last year was 5%, and expected inflation is 8%, the Fisher effect predicts what current level of nominal interest rates?

Accepted Answer

A)  9% 
B)  8% 
C)  13% 
D)  12% 
A)  9% 
B)  8% 
C)  13% 
D)  12%

Question 12

Economic models and flow-of-funds are two ways of forecasting interest rates.

Accepted Answer

A) True 
 B)False

Question 13

You are the Chief Economist of Free Formosan Investment and are conducting research on inflation forecasting by using the information of the Treasury Inflation-Protected Securities (TIPS). The information that you have are as the following: Nominal yield on 10-year nonindexed Treasury bond is 4.5%; Real yield on 10-year TIPS is 2.25%; The market adjustment for inflation and liquidity risk is 45 basis-points. What is the expected annual inflation rate over the next decade?

Accepted Answer

4.5% - 2.2

Question 14

A person with a very high positive time preference for consumption

Accepted Answer

A)  will have a high savings rate. 
B)  will have a low savings rate. 
C)  prefers savings to consumption. 
D)  is not as likely to borrow money as other people with lower positive time preference. 
A)  will have a high savings rate. 
B)  will have a low savings rate. 
C)  prefers savings to consumption. 
D)  is not as likely to borrow money as other people with lower positive time preference.

Question 15

Which one of the following statements about interest rates is incorrect?

Accepted Answer

A)  Bond prices and interest rates change inversely with one another. 
B)  The expected rate of inflation affects current market interest rates. 
C)  Short-term interest rates are not as volatile as long-term interest rates. 
D)  Interest rates are directly related to the level of output in the economy. 
A)  Bond prices and interest rates change inversely with one another. 
B)  The expected rate of inflation affects current market interest rates. 
C)  Short-term interest rates are not as volatile as long-term interest rates. 
D)  Interest rates are directly related to the level of output in the economy.

Question 16

Which of the following actions will reduce the interest rate risk of the lender?

Accepted Answer

A)  Make fixed interest rate loans. 
B)  Make fixed interest rate, long-term loans. 
C)  Make variable interest rate loans. 
D)  Invest in fixed rate Treasury bonds. 
A)  Make fixed interest rate loans. 
B)  Make fixed interest rate, long-term loans. 
C)  Make variable interest rate loans. 
D)  Invest in fixed rate Treasury bonds.

Question 17

The Federal Reserve Bank of St. Louis develops quarterly forecasts of a number of key economic statistics using only eight equations. The is an example of

Accepted Answer

A)  a naive forecasting model. 
B)  the flow of funds approach. 
C)  a hedged forecast. 
D)  an economic forecasting model. 
A)  a naive forecasting model. 
B)  the flow of funds approach. 
C)  a hedged forecast. 
D)  an economic forecasting model.

Question 18

Negative realized real rates of interest are associated with periods where

Accepted Answer

A)  inflation forecasts significantly underestimate inflation. 
B)  nominal interest rates were too high relative to actual inflation. 
C)  prior inflation forecasts overestimated inflation. 
D)  bond prices were priced too low relative to actual inflation. 
A)  inflation forecasts significantly underestimate inflation. 
B)  nominal interest rates were too high relative to actual inflation. 
C)  prior inflation forecasts overestimated inflation. 
D)  bond prices were priced too low relative to actual inflation.

Question 19

An increase in the rate of expected inflation will

Accepted Answer

A)  shift the demand for loanable funds to the left (down). 
B)  shift the supply of loanable funds to the left (down). 
C)  shift demand and supply for loanable funds to the right (up) decreasing interest rates. 
D)  shifts demand and supply for loanable funds to the right (up) increasing interest rates. 
A)  shift the demand for loanable funds to the left (down). 
B)  shift the supply of loanable funds to the left (down). 
C)  shift demand and supply for loanable funds to the right (up) decreasing interest rates. 
D)  shifts demand and supply for loanable funds to the right (up) increasing interest rates.

Question 20

On any given day if the market interest rate is above the equilibrium interest rate level,

Accepted Answer

A)  the Fed will declare a monetary policy. 
B)  there will be a shortage of loanable funds and interest rates will increase. 
C)  there will be a surplus of loanable funds at that rate and rates will decline to the equilibrium rate. 
D)  there will be a shortage of loanable funds at that rate and rates will increase to the equilibrium rate. 
A)  the Fed will declare a monetary policy. 
B)  there will be a shortage of loanable funds and interest rates will increase. 
C)  there will be a surplus of loanable funds at that rate and rates will decline to the equilibrium rate. 
D)  there will be a shortage of loanable funds at that rate and rates will increase to the equilibrium rate.

Interest rates move __ with expected inflation; _ with economic activity.

The Fisher Effect holds that nominal interest rates include an expected inflation rate.

The demand for loanable funds may shift upward (increase) from

An investor loaned money at 14 percent with an expected rate of inflation of 11 percent. During the year the actual rate of inflation was 8 percent. The investor's expected real rate of interest was _ and the realized real rate for the investor was __?

Explain why realized real rates of interest are sometimes negative, but expected real rates are always positive. Give an example.

The current rate of inflation affects the expected level of interest rates.

Economies with very high current and expected inflation rates

For a investment project to be accepted by management, its return must exceed the firm's cost of capital.

The market rate of interest can be viewed as the real rate of interest plus a premium for the expected rate of inflation.

Economic models forecast interest rates then estimate measures of economic output.

If the real rate of interest is 4%, actual inflation for the last year was 5%, and expected inflation is 8%, the Fisher effect predicts what current level of nominal interest rates?

Economic models and flow-of-funds are two ways of forecasting interest rates.

A person with a very high positive time preference for consumption

Which one of the following statements about interest rates is incorrect?

Which of the following actions will reduce the interest rate risk of the lender?

The Federal Reserve Bank of St. Louis develops quarterly forecasts of a number of key economic statistics using only eight equations. The is an example of

Negative realized real rates of interest are associated with periods where

An increase in the rate of expected inflation will

On any given day if the market interest rate is above the equilibrium interest rate level,

An Overview of Financial Markets and Institutions

The Federal Reserve and Its Powers

The Fed and Interest Rates

Bond Prices and Interest Rate Risk

The Structure of Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Equity Markets

Derivatives Markets

International Markets

Commercial Bank Operations

International Banking

Regulation of Financial Institutions

Thrift Institutions and Finance Companies

Insurance Companies and Pension Funds

Investment Banking

Investment Companies

Risk Management in Financial Institutions

Filters

Exam 4: The Level of Interest Rates

Interest rates move ______ with expected inflation; _____ with economic activity.

The Fisher Effect holds that nominal interest rates include an expected inflation rate.

The demand for loanable funds may shift upward (increase) from

An investor loaned money at 14 percent with an expected rate of inflation of 11 percent. During the year the actual rate of inflation was 8 percent. The investor's expected real rate of interest was _____ and the realized real rate for the investor was ______?

Explain why realized real rates of interest are sometimes negative, but expected real rates are always positive. Give an example.

The current rate of inflation affects the expected level of interest rates.

Economies with very high current and expected inflation rates

For a investment project to be accepted by management, its return must exceed the firm's cost of capital.

The market rate of interest can be viewed as the real rate of interest plus a premium for the expected rate of inflation.

Economic models forecast interest rates then estimate measures of economic output.

If the real rate of interest is 4%, actual inflation for the last year was 5%, and expected inflation is 8%, the Fisher effect predicts what current level of nominal interest rates?

Economic models and flow-of-funds are two ways of forecasting interest rates.

A person with a very high positive time preference for consumption

Which one of the following statements about interest rates is incorrect?

Which of the following actions will reduce the interest rate risk of the lender?

The Federal Reserve Bank of St. Louis develops quarterly forecasts of a number of key economic statistics using only eight equations. The is an example of

Negative realized real rates of interest are associated with periods where

An increase in the rate of expected inflation will

On any given day if the market interest rate is above the equilibrium interest rate level,

An Overview of Financial Markets and Institutions

The Federal Reserve and Its Powers

The Fed and Interest Rates

Bond Prices and Interest Rate Risk

The Structure of Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Equity Markets

Derivatives Markets

International Markets

Commercial Bank Operations

International Banking

Regulation of Financial Institutions

Thrift Institutions and Finance Companies

Insurance Companies and Pension Funds

Investment Banking

Investment Companies

Risk Management in Financial Institutions

Filters

Interest rates move __ with expected inflation; _ with economic activity.

An investor loaned money at 14 percent with an expected rate of inflation of 11 percent. During the year the actual rate of inflation was 8 percent. The investor's expected real rate of interest was _ and the realized real rate for the investor was __?