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

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

Which of the following is not an assumption of the rational expectations theory?

In the loanable funds theory of interest, the supply of savings curve is assumed to be highly interest elastic.

The transaction motive for holding money represents the demand for money to purchase goods and services in more than one year.

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

The speculative motive stems from uncertainty about the future prices of bonds.

One of the essential contributions of the money and capital markets is to direct the savings of older individuals into the hands of younger individuals who desire to improve their current standard of living by borrowing.

According to the textbook, predicting interest rates in one nation based on those prevailing in another with a significant rate of accuracy is fairly easy to do.

Interest rates are a key factor in decisions by government officials on how much to save.

Retained earnings are an important measure of savings by business firms.

According to the Liquidity Preference Theory which of the following statements is correct?

Recently, the Japanese economy experienced a "liquidity trap," wherein:

According to the liquidity effect, an increase in the nation's money supply with money demand unchanged would cause interest rates to rise due to increased inflation.

Declining interest rates result in declining bond and stock prices.

Contraction of a nation's money supply by its central bank will, ceteris paribus, result in higher interest rates.

Changes in net investment by business are closely linked to fluctuations in a nation's output of goods and services, employment and prices. In fact, substantial cutbacks in inventory investment and long-term capital spending occur on average every 3 to 4 years in the U.S., usually precipitating a period of inflation.

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

According to the textbook, interest rates in one country can no longer be viewed as separate and independent from interest rates in other countries.

Saving by business firms, according to your text, depends upon two key factors: one of these factors is the level of business profits; the other is:

The precautionary motive for holding money arises because