Question 1

The act of increased hoarding of money by the public will result in lower interest rates, other factors held constant.

Accepted Answer

A) True 
 B)False

Question 2

If the number of younger workers declines and the proportion of older wage earners and retirees continue rising, the U.S. and other leading industrialized economies should experience a rise in expected per-capital real income, resulting in an acceleration of current consumption and less saving in the long run, according to the textbook.

Accepted Answer

A) True 
 B)False

Question 3

The rational expectations theory suggests that to be a consistently correct interest-rate forecaster you must know what market participants expect to happen and:

Accepted Answer

A)  Which way interest rates have gone in the recent past 
B)  What new information will arrive in the market before that information actually arrives 
C)  How much value the marketplace currently places on new information 
D)  What reasonably could happen to market interest rates given their performance to date 
E)  None of the above are correct 
A)  Which way interest rates have gone in the recent past 
B)  What new information will arrive in the market before that information actually arrives 
C)  How much value the marketplace currently places on new information 
D)  What reasonably could happen to market interest rates given their performance to date 
E)  None of the above are correct

Question 4

The rational expectations theory suggests that to be a consistently correct interest-rate forecaster you must know what market participants expect to happen and:

Accepted Answer

A)  Which way interest rates have gone in the recent past 
B)  A Masters degree in finance 
C)  How much value the marketplace currently places on new information 
D)  What reasonably could happen to market interest rates given their performance to date 
E)  None of the above are correct 
A)  Which way interest rates have gone in the recent past 
B)  A Masters degree in finance 
C)  How much value the marketplace currently places on new information 
D)  What reasonably could happen to market interest rates given their performance to date 
E)  None of the above are correct

Question 5

Using each of the sentences or phrases listed below, indicate which key term or concept presented in this chapter goes with them:
 a. The credit view of what determines the level of and changes in interest rates. 
b. Interest rates change as changes occur in the supply and demand for cash balances. 
c. Market interest rates depend upon savings and investment demand.

Accepted Answer

a. The Classical Theory of Int

Question 6

The one fundamental interest rate in the economy is known as the pure or risk-free rate of interest.

Accepted Answer

A) True 
 B)False

Question 7

The cautionary motive for holding money arises because we live in a certain world and can predict exactly what our expenditures and our income will be in the future.

Accepted Answer

A) True 
 B)False

Question 8

The risk-free interest rate represents the"opportunity cost" of holding idle money.

Accepted Answer

A) True 
 B)False

Question 9

According to the Classical Theory's long-run view of the forces driving interest rates people's consumption and savings habits tend to follow a predictable ____ younger workers borrowing heavily and older workers saving more. The word or phrase that correctly fills in the above blank is:

Accepted Answer

A)  Life cycle 
B)  Time preference 
C)  Consumption-savings component 
D)  Pattern of deferred consumption 
E)  None of the above 
A)  Life cycle 
B)  Time preference 
C)  Consumption-savings component 
D)  Pattern of deferred consumption 
E)  None of the above

Question 10

The speculative motive for holding money

Accepted Answer

A)  Of the uncertainty of future income 
B)  From the uncertainty of future bond prices 
C)  Of the need to purchase goods and services 
D)  All of the above 
E)  None of the above 
A)  Of the uncertainty of future income 
B)  From the uncertainty of future bond prices 
C)  Of the need to purchase goods and services 
D)  All of the above 
E)  None of the above

Question 11

Equilibrium in the economy requires that planned saving equals planned consumption.

Accepted Answer

A) True 
 B)False

Question 12

The motive for holding money in response to expected changes in interest rates is known as the:

Accepted Answer

A)  Transactions motive 
B)  Precautionary motive 
C)  Speculative motive 
D)  Liquidity motive 
E)  None of the above 
A)  Transactions motive 
B)  Precautionary motive 
C)  Speculative motive 
D)  Liquidity motive 
E)  None of the above

Question 13

Equilibrium in the loanable funds market requires that the supply of savings equal the difference between money demand and the amount of investment demand.

Accepted Answer

A) True 
 B)False

Question 14

The risk-free rate is a component of all interest rates.

Accepted Answer

A) True 
 B)False

Question 15

The liquidity preference theory of interest is essentially a long run, not a short run, theory of interest rate determination.

Accepted Answer

A) True 
 B)False

Question 16

A popular method of calculating the expected rate of return from a business investment project is the:

Accepted Answer

A)  Operating capacity method 
B)  Marginal cost-of -capital approach 
C)  Internal rate-of-return method 
D)  Risk-adjusted net-cash-flow approach 
E)  Certainty-equivalent cost analysis
F) None of the above 
A)  Operating capacity method 
B)  Marginal cost-of -capital approach 
C)  Internal rate-of-return method 
D)  Risk-adjusted net-cash-flow approach 
E)  Certainty-equivalent cost analysis
F) None of the above

Question 17

In the real world there is no such thing as "the interest rate."

Accepted Answer

A) True 
 B)False

Question 18

When a family's overall wealth increases, their consumption expenditures increase because their need for additional savings to meet their savings target is reduced is referred to as the wealth effect.

Accepted Answer

A) True 
 B)False

Question 19

The so-called substitution effect suggests there is a negative relationship between changes in interest rates and changes in the volume of savings.

Accepted Answer

A) True 
 B)False

Question 20

Given the following equations for the demand and supply of money, determine the equilibrium interest rate. MD = 33 - 2i MS = 3 + 3i

Accepted Answer

A)  3% 
B)  6% 
C)  9% 
D)  12% 
E)  15%
F) Not enough information 
A)  3% 
B)  6% 
C)  9% 
D)  12% 
E)  15%
F) Not enough information

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

The act of increased hoarding of money by the public will result in lower interest rates, other factors held constant.

The rational expectations theory suggests that to be a consistently correct interest-rate forecaster you must know what market participants expect to happen and:

The rational expectations theory suggests that to be a consistently correct interest-rate forecaster you must know what market participants expect to happen and:

The one fundamental interest rate in the economy is known as the pure or risk-free rate of interest.

The cautionary motive for holding money arises because we live in a certain world and can predict exactly what our expenditures and our income will be in the future.

The risk-free interest rate represents the"opportunity cost" of holding idle money.

According to the Classical Theory's long-run view of the forces driving interest rates people's consumption and savings habits tend to follow a predictable ____ younger workers borrowing heavily and older workers saving more. The word or phrase that correctly fills in the above blank is:

The speculative motive for holding money

Equilibrium in the economy requires that planned saving equals planned consumption.

The motive for holding money in response to expected changes in interest rates is known as the:

Equilibrium in the loanable funds market requires that the supply of savings equal the difference between money demand and the amount of investment demand.

The risk-free rate is a component of all interest rates.

The liquidity preference theory of interest is essentially a long run, not a short run, theory of interest rate determination.

A popular method of calculating the expected rate of return from a business investment project is the:

In the real world there is no such thing as "the interest rate."

When a family's overall wealth increases, their consumption expenditures increase because their need for additional savings to meet their savings target is reduced is referred to as the wealth effect.

The so-called substitution effect suggests there is a negative relationship between changes in interest rates and changes in the volume of savings.

Given the following equations for the demand and supply of money, determine the equilibrium interest rate. MD = 33 - 2i MS = 3 + 3i

Understanding the Financial System and Its Impact on the Economy and Markets

Financial Systems, Monetary Units, and the Role of Money in the Economy

Financial Indices, Market Information, and Economic Data

The Financial Crisis and Its Impact on the Mortgage Market and Economy

Financial Concepts and Interest Rates

Effects of Inflation and Yield Curves on Stock Prices and Investments

Understanding Risk and Market Factors in Financial Securities

Exploring Financial Markets and Hedging Strategies

Factors Affecting the Volume of CDs

Exploring the Reserve Accounting System, Money Markets, and Financial Instruments

Exploring Central Banks and Their Impact on the Economy and Financial System

Central Banking and Monetary Policy: Exploring Tools and Strategies

Banking and Financial Services: Regulations, Operations, and Trends

Comparative Analysis of Financial Institutions and Their Operations

Exploring Various Aspects of Pension Funds, Finance Companies, and Insurance Industry

The Impact of Deregulation and Regulation on Financial Institutions and Banking Industry in the United States

Treasury Auctions, Public Debt, and Government Borrowing: Exploring the Us Treasury System

Corporate Bond Pricing, Market Development, and Financing Strategies

The Truth About Regulation Fd and Stock Holdings: Debunking Common Myths in the Financial Market

Flexible Savings Account Options

Mortgage Market and Mortgage Instruments

International Financial Transactions and Balance of Payments

International Banking and Financial Regulations

Exploring the Complexities of Financial Services and Regulation

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