Exam 5: Understanding Interest Rates, Savings, and the Wealth Effect

Current research suggests that past interest rate movements are not significantly related to current rates of return on bonds and stock.

The increased foreign supply of loanable funds to U.S. credit markets stems in part from the Federal Reserve lowering the prime interest rate.

Most government saving is unintended and occurs infrequently.

According to the income effect, a rise in interest rates may cause individuals to save more in an effort to reach their savings goal more rapidly.

According to the textbook, among the most prominent interest rate determining forces at work in recent years has (or have) been:

Gross investment equals net investment minus replacement investment.

According to the classical theory of interest, the pure interest rate is determined by the interaction of the demand for and supply of money.

A government securities dealer buys a 12 year Treasury bond with a 9 percent coupon rate at par ($1000). New bonds with comparable terms rise to 11 percent. What will happen to the 9 percent bond's market price? What price will it approach? Answer these same questions in the case where bond rates decline to 7 percent. Explain the price changes you have calculated.

Using each of the sentences or phrases listed below, indicate which key term or concept presented in this chapter goes with them: a. Higher interest rates increase the volume of savings. b. Rate of return on a riskless security. c. The price paid to gain access to credit.

According to the long-run view of interest rates in the Classical Theory future interest rates should average lower than today's interest rates due to population aging.

Which of the following statements describes a role performed by the rate of interest in the economy?

The theory of interest which assumes that the money and capital markets are highly efficient social institutions in digesting and reacting to new information is known as:

In the loanable funds theory the demand for loanable funds in the business sector falls as interest rates increase.

The theory which argues that the risk-free interest rate is determined by the interaction of the demand for money and the nation's supply of money is known as the:

Equilibrium in the foreign currency markets means that the U.S. dollar establishes a stable price vis-à-vis the British pound, but not necessarily with other foreign currencies.

A stable equilibrium interest rate in the loanable funds market requires that:

Rising business profits usually are associated with rising interest rates in the money and capital markets.

Rising interest rates will cause:

Positive hoarding of money takes place when the demand for money is less than the supply.

The majority of funds drawn upon for investment financing by business firms come from borrowing in the money and capital markets.