Exam 4: The Level of Interest Rates

The real rate of interest can be viewed as the time value of not consuming.

Expected increases in inflation usually drive up bond prices.

If a country's currency is expected to depreciate, its interest rates may decrease.

Sam has just lent Mary $1000 for 1 year at 6%. Sam and Mary expect inflation to be 3% over the next year. If inflation turns out to have been only 2%, what is the impact upon Sam and Mary?

Using loanable funds theory, discuss how changes in consumer savings, business investment, and in the money supply by the Federal Reserve System can influence the level of interest rates.

The Fisher Effect holds that nominal interest rates include a premium for expected inflation.

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

An increase in rates of return on real capital investment will increase real interest rates.

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