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

What are the functions or roles played by the rate of interest in the economy and financial system? Can you explain why each function or role that you list is important to the well-being of individuals, businesses and governments?

Explain how the equilibrium loanable funds interest rate is determined. Please draw a picture of what the equilibrium rate of interest might look like under the Loanable Funds theory.

When U.S. interest rates rise relative to interest rates prevailing overseas, a large-scale sell-off of U.S. bonds and stocks usually occurs as both U.S. and foreign investors buy more securities outside the U.S. in foreign markets, according to the textbook.

The Net Present Value (NPV) method for making investment decisions has the following advantages over the Internal Rate of Return (IRR) method:

The motive for holding money as a reserve for future emergencies and to cover extraordinary expenses is referred to as the:

Construct a supply of savings curve which illustrates the income effect. The wealth effect. Explain the differences you observe.

Suppose the price of a perpetual bond (i.e., a bond with infinite maturity) is $500 and it pays the holder $25 in interest income annually. What is its interest rate, yield or rate or return?

According to the liquidity preference theory

According to the Rational Expectations Theory, if the market expects more government borrowing, rates will rise.

The motive for holding money to purchase goods and services is referred to as the:

Equilibrium in the money market requires the money supply be equal to the amount of hoarding demand.

The Classical theorists believed that the demand for investment capital is negatively related to the rate of interest: when interest rates are low, more funds are required while higher interest rates decrease the demand for investment capital.

Suppose the interest rate grows from 6 percent to 8 percent and the volume of current saving advances at the same time from $125 billion to $130 billion. This simultaneous movement in interest and savings volume describes the:

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

What determines the equilibrium interest rate under the Liquidity Preference Theory of Interest? Please draw what this equilibrium interest rate looks like. Explain what forces cause the equilibrium interest rate to move, according to the Liquidity Preference idea?

The money and capital markets make a vital contribution by directing the savings of older individuals into the:

According to the rational expectations view of interest rates, the forecasting of rates requires knowledge of the public's current set of interest rate expectations.

When U.S. interest rates decline relative to foreign interest rates, capital flows out of the United States to seek the higher rates available abroad.

The increased foreign supply of loanable funds to U.S. credit markets stems in part from commercial banks in Western Europe and the Pacific Rim.

According to the classical theory of interest, the payment of interest is considered to be a reward for waiting.