Question 1

Which of the following will not cause a decrease in the present value of a sequence of payments?

Accepted Answer

A)  An increase in a future expected payment. 
B)  A decrease in a future expected payment. 
C)  An increase in the current interest rate. 
D)  A decrease in the current payment. 
E)  An increase in expected future interest rates. 
A)  An increase in a future expected payment. 
B)  A decrease in a future expected payment. 
C)  An increase in the current interest rate. 
D)  A decrease in the current payment. 
E)  An increase in expected future interest rates. A

Question 2

Suppose output is growing at 3% and the nominal money stock is growing at 0%. Also assume that the economy has reached its medium- run equilibrium. Given this information, we know with certainty that:

Accepted Answer

A)  inflation is greater than 3%. 
B)  inflation is equal to 3%. 
C)  deflation occurs. 
D)  inflation is positive. 
E)  the real interest rate is equal to the nominal interest rate. 
A)  inflation is greater than 3%. 
B)  inflation is equal to 3%. 
C)  deflation occurs. 
D)  inflation is positive. 
E)  the real interest rate is equal to the nominal interest rate. C

Question 3

For this question, assume that the nominal interest rate does not change. In this situation, a decrease in expected inflation will cause:

Accepted Answer

A)  an increase in investment. 
B)  an increase in the real interest rate. 
C)  a decrease in the real interest rate. 
D)  an increase in consumption. 
E)  an increase in money demand. 
A)  an increase in investment. 
B)  an increase in the real interest rate. 
C)  a decrease in the real interest rate. 
D)  an increase in consumption. 
E)  an increase in money demand. B

Question 4

Because expected inflation is typically positive, we know that:

Accepted Answer

A)  the nominal interest rate is generally less than the real interest rate. 
B)  the real interest rate rate is approximately equal to zero. 
C)  the nominal interest can be negative. 
D)  the real interest rate is generally less than the nominal interest rate. 
E)  the nominal and real interest rates are generally equal. 
A)  the nominal interest rate is generally less than the real interest rate. 
B)  the real interest rate rate is approximately equal to zero. 
C)  the nominal interest can be negative. 
D)  the real interest rate is generally less than the nominal interest rate. 
E)  the nominal and real interest rates are generally equal.

Question 5

Suppose the nominal interest rate is zero. In this situation, the present discounted value of a finite sequence of future payments is equal to which of the following:

Accepted Answer

A)  the sum of zero. 
B)  the square of the sum of all payments. 
C)  the sum of all the payments divided by the rate of inflation. 
D)  the sum of all payments. 
E)  the average value of each payment. 
A)  the sum of zero. 
B)  the square of the sum of all payments. 
C)  the sum of all the payments divided by the rate of inflation. 
D)  the sum of all payments. 
E)  the average value of each payment.

Question 6

Explain whether it is possible for the nominal interest rate to increase while the real interest rate simultaneously decreases.

Accepted Answer

The nominal interest rate is determined

Question 7

To what extent can the central bank affect the real interest rate in the medium run? Explain.

Accepted Answer

The real rate in the medium run is deter

Question 8

Suppose there is a decrease in government spending. Such a fiscal policy action will cause:

Accepted Answer

A)  the natural real interest rate to rise. 
B)  the natural real interest rate to fall. 
C)  ambiguous effects on the natural real interest rate. 
D)  no effect on the natural real interest rate. 
E)  the natural real interest rate falls when the nominal rate falls. 
A)  the natural real interest rate to rise. 
B)  the natural real interest rate to fall. 
C)  ambiguous effects on the natural real interest rate. 
D)  no effect on the natural real interest rate. 
E)  the natural real interest rate falls when the nominal rate falls.

Question 9

Suppose there is an increase in government spending. Such a fiscal policy action will cause:

Accepted Answer

A)  the natural level of output to rise. 
B)  the natural level of output to fall. 
C)  ambiguous effects on the natural level of output. 
D)  no effect on the natural level of output. 
E)  the natural level of output rises when the natural real interest rate falls. 
A)  the natural level of output to rise. 
B)  the natural level of output to fall. 
C)  ambiguous effects on the natural level of output. 
D)  no effect on the natural level of output. 
E)  the natural level of output rises when the natural real interest rate falls.

Question 10

What are the determinants of the nominal interest rate in the medium run? Based on your answer, to what extent can monetary policy affect the nominal interest rate in the medium run? Briefly explain. And finally, to what extent can fiscal policy affect the nominal interest rate in the medium run? Briefly explain.

Accepted Answer

Through the Fisher effect, the nominal i

Question 11

Suppose the central bank engages in expansionary monetary policy that results in higher money growth. This higher money growth will cause which of the following in the short run?

Accepted Answer

A)  Lower real interest rates and lower nominal interest rates. 
B)  Lower real interest rates and higher nominal interest rates. 
C)  Higher real interest rates and higher nominal interest rates. 
D)  Higher real interest rates and lower nominal interest rates. 
E)  No change in either nominal or real interest rates. 
A)  Lower real interest rates and lower nominal interest rates. 
B)  Lower real interest rates and higher nominal interest rates. 
C)  Higher real interest rates and higher nominal interest rates. 
D)  Higher real interest rates and lower nominal interest rates. 
E)  No change in either nominal or real interest rates.

Question 12

First, explain what the nominal interest rate represents. Second, explain what the real interest rate represents.

Accepted Answer

The nominal interest rate, i, represents

Question 13

Which of the following must occur for the nominal interest rate to be equal to the real interest rate?

Accepted Answer

A)  Expected inflation is equal to the nominal interest rate. 
B)  Expected inflation is equal to the real interest rate. 
C)  The nominal and real interest rates can never be equal. 
D)  Expected inflation is equal to zero. 
E)  Expected inflation is equal to twice the real interest rate. 
A)  Expected inflation is equal to the nominal interest rate. 
B)  Expected inflation is equal to the real interest rate. 
C)  The nominal and real interest rates can never be equal. 
D)  Expected inflation is equal to zero. 
E)  Expected inflation is equal to twice the real interest rate.

Question 14

Suppose households feel more optimistic about the future and decide to increase consumption. This rise in consumer confidence will cause:

Accepted Answer

A)  the natural real interest rate to rise. 
B)  the natural real interest rate to fall. 
C)  ambiguous effects on the natural real interest rate. 
D)  no effect on the natural real interest rate. 
E)  the natural real interest rate falls when the nominal rate falls. 
A)  the natural real interest rate to rise. 
B)  the natural real interest rate to fall. 
C)  ambiguous effects on the natural real interest rate. 
D)  no effect on the natural real interest rate. 
E)  the natural real interest rate falls when the nominal rate falls.

Question 15

If the nominal interest rate in year t is 15%, and the expected inflation rate for year t is 3%, then the real interest rate in year t is approximately:

Accepted Answer

A)  12%. 
B)  2%. 
C)  3%. 
D)  5%. 
E)  8%. 
A)  12%. 
B)  2%. 
C)  3%. 
D)  5%. 
E)  8%.

Question 16

With a constant nominal interest rate equal to i, the present discounted value of $1.00 to be received 6 years from today is equal to:

Accepted Answer

A)  1 + i. 
B)  1/(1 + i)6. 
C)  i6. 
D)  6(1 + i). 
E)  (1 + i)6. 
A)  1 + i. 
B)  1/(1 + i)6. 
C)  i6. 
D)  6(1 + i). 
E)  (1 + i)6.

Question 17

Discuss the demand- side factors and the role of deflation in contributing to the Great Depression in Australia.

Accepted Answer

The effects of the Great Depression in t

Question 18

With a nominal interest rate of 22% per year, the present discounted value of $1100 to be received in two years is:

Accepted Answer

A)  $684.05. 
B)  $725.05. 
C)  $843.05. 
D)  $807.05. 
E)  $739.05. 
A)  $684.05. 
B)  $725.05. 
C)  $843.05. 
D)  $807.05. 
E)  $739.05.

Question 19

Let: (1) Pt be the price of one unit of a market basket of goods (i.e., a composite commodity) in year t; (2) P e be the expected price of one unit of a market basket of goods in year t + 1; (3) u e be the
Expected rate of inflation between period t and t + 1; and (4) it be the one- year nominal interest rate. Suppose an individual borrows the equivalent of one unit of a composite commodity today. Given this information, which of the following expressions represents (i.e., is equal to) the amount of the composite commodity one must repay in one year?

Accepted Answer

A)  [(1 + u e )/(1 + it)]- 1. 
B)  [(1 + it) P e /Pt]- 1. 
C)  [(1 + u e )/(1 + it)]+1. 
D)  (1 + u e )/(1 + it). 
E)  (1 + it)Pt/ P e . 
A)  [(1 + u e )/(1 + it)]- 1. 
B)  [(1 + it) P e /Pt]- 1. 
C)  [(1 + u e )/(1 + it)]+1. 
D)  (1 + u e )/(1 + it). 
E)  (1 + it)Pt/ P e .

Question 20

If the nominal interest rate falls, and the expected inflation rate rises, we know that the real interest rate:

Accepted Answer

A)  will decrease. 
B)  will decrease, but only if the decrease in the nominal rate is smaller than the increase in expected inflation. 
C)  cannot be defined. 
D)  will increase. 
E)  will increase, but only if the decrease in the nominal rate is greater than the increase in expected inflation. 
A)  will decrease. 
B)  will decrease, but only if the decrease in the nominal rate is smaller than the increase in expected inflation. 
C)  cannot be defined. 
D)  will increase. 
E)  will increase, but only if the decrease in the nominal rate is greater than the increase in expected inflation.

Exam 14: Expectations: the Basic Tools

Which of the following will not cause a decrease in the present value of a sequence of payments?

Suppose output is growing at 3% and the nominal money stock is growing at 0%. Also assume that the economy has reached its medium- run equilibrium. Given this information, we know with certainty that:

For this question, assume that the nominal interest rate does not change. In this situation, a decrease in expected inflation will cause:

Because expected inflation is typically positive, we know that:

Suppose the nominal interest rate is zero. In this situation, the present discounted value of a finite sequence of future payments is equal to which of the following:

Explain whether it is possible for the nominal interest rate to increase while the real interest rate simultaneously decreases.

To what extent can the central bank affect the real interest rate in the medium run? Explain.

Suppose there is a decrease in government spending. Such a fiscal policy action will cause:

Suppose there is an increase in government spending. Such a fiscal policy action will cause:

Suppose the central bank engages in expansionary monetary policy that results in higher money growth. This higher money growth will cause which of the following in the short run?

First, explain what the nominal interest rate represents. Second, explain what the real interest rate represents.

Which of the following must occur for the nominal interest rate to be equal to the real interest rate?

Suppose households feel more optimistic about the future and decide to increase consumption. This rise in consumer confidence will cause:

If the nominal interest rate in year t is 15%, and the expected inflation rate for year t is 3%, then the real interest rate in year t is approximately:

With a constant nominal interest rate equal to i, the present discounted value of $1.00 to be received 6 years from today is equal to:

Discuss the demand- side factors and the role of deflation in contributing to the Great Depression in Australia.

With a nominal interest rate of 22% per year, the present discounted value of $1100 to be received in two years is:

If the nominal interest rate falls, and the expected inflation rate rises, we know that the real interest rate:

A Tour of the World

A Tour of the Book

The Goods Market

Financial Markets

Goods and Financial Markets: the Islm Model

The Labour Market

Putting All Markets Together: the Asad Model

The Phillips Curve, the Natural Rate of Unemployment and Inflation

The Crisis

The Facts of Growth

Saving, Capital Accumulation and Output

Technological Progress and Growth

Technological Progress: the Short, the Medium and the Long Run

Financial Markets and Expectations

Expectations, Consumption and Investment

Expectations, Output and Policy

Openness in Goods and Financial Markets

The Goods Market

Output, the Interest Rate and the Exchange Rate

Exchange Rate Regimes

Should Policy-Makers Be Restrained

Fiscal Policy: a Summing up

Monetary Policy: a Summing up

Epilogue: the Story of Macroeconomics

Filters